Stocks Snap Three-Week Losing Streak But Concerns Linger

Aside from the Bankia bailout news, Standard and Poor's cut its ratings on five banks with Bankia's bonds seeing a cut to junk status. The rating agency also raised its risk assessment of Spain's economic imbalances to "very high risk" from "high risk."

Adding to the mix, traders were dealing earlier in the day with a Financial Times report that some of Europe's largest fund managers were dumping their euro assets on Greek uncertainties.

"The ripple effects -- that's what everybody's worried about with Europe," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com.

He thinks if European leaders were able to come up with a temporary six-month fix for eurozone debt contagion problems amid their ongoing meetings, it could be enough to get the markets "back to the races."

Still, London's FTSE settled up 0.03%, and the DAX in Germany closed up 0.4% amid signs that consumer confidence was stabilizing in the country. Earlier in Asia, the Hang Seng index in Hong Kong settled up 0.3% and Japan's Nikkei closed up 0.2%.

In the U.S., investors were stepping back to digest the negative headlines ahead of the long weekend. "Desks are half-staffed, or there's just a skeleton crew at most desks and things are quiet" ahead of the Memorial Day holiday weekend, said Lawrence Creatura, portfolio manager at Federated Investors.

"Given that everybody made money earlier in the year, they're figuring, 'what I'll do is given all this risk, let me take some stuff off the table and I'll go to the beach,'" said Doug Roberts,

A bright spot in the headlines was the far-better-than-expected final read for the Thomson Reuters/University of Michigan index of consumer sentiment in May, which increased to 79.3 -- the strongest since October 2007 -- from the preliminary read of 77.8, most likely due to falling gasoline prices. Economists on average were expecting a repeat the previous read.

But after this week's thin economic calendar, some market watchers were already looking ahead to upcoming key datapoints.

"Next week's avalanche of data will offer an important test" for the Federal Reserve to see whether economic data can soften "just enough" in the coming weeks to provide the necessary cover for more monetary easing, Societe Generale said. Now that the midpoint of the year is approaching, the "fiscal cliff" is becoming a growing source of concern for the Fed, they said.