The Nasdaq fell 21.73 to 2,107.13 for the day, and the Dow Jones industrial average lost 89.13 to 1,0821.31.
Two reports indicated that U.S. consumers were starting to spend more again, easing concerns about economic weakness. Though the news is a sign of a healthy economy, it also means the Fed may not intervene with a whole 50-basis point cut to interest rates when it meets next Tuesday. Even if it does, chances that it will continue to be aggressive with rate cuts are slimming.
"The market is coming to terms that it is at the end of the rope from the Fed standpoint," Jeff Kleintop, chief investment strategist at PNC Advisors, told Reuters. "We are likely to see another 50-basis-point cut at the next meeting. Five cuts of 50-basis points in five months--it doesn't get much better than that."
The Commerce Department said retail spending rose a stronger-than-expected 0.8 percent in April, breaking a two-month streak of declines.
A separate report from the University of Michigan showed consumer sentiment rose unexpectedly in May, stopping a long slide and suggesting spending may hold steady in the months ahead.
Another report showed U.S. inflation at the wholesale level was tame in April. The Labor Department said the Producer Price Index, which measures wholesale prices paid to businesses for ready-to-sell goods such as clothing and gasoline, rose by 0.3 percent last month after a 0.1 percent drop in March.
In company news, Compaq Computer, down 19 cents to $15.91, declined to raise its bid for Proxicom, down 33 cents to $7.31 on Friday. This prompted the Internet services company to proceed with plans to merge with its other suitor, Dimension Data Holdings, a South African tech company.
Shares of business-to-business software vendor Ariba fell $1.26 to $6.89 on fears that Gartner would issue a negative report on the company "within the month," said an analyst from Deutsche Banc Alex Brown. The analyst also said that Ariba was struggling to compete and could cut prices on its software licenses.
Pegasus Communications had its wings clipped by a few downgrades Friday and plummeted $4.18 to $21.90. Analysts said the direct broadcast satellite company's first quarter was weak, and management's plans were confusing.
Nortel Networks, off 66 cents to $14.56, is stepping up its search for a successor to CEO John Roth after the retirement of its chief operating officer, the company said Friday.
Insiders at eBay, down $1.10 to $53.21, have registered to sell more than $100 million in shares, according to documents filed with the Securities and Exchange Commission.
Amazon.com was up 6 cents to $14.68. AOL Time Warner lost 81 cents to $51.64, and Yahoo shed 51 cents to $17.72.
Cisco Systems rose 19 cents to $19.02. Intel lost $1.07 to $27.94. Microsoft fell 60 cents to $69.40, and Oracle fell 51 cents to $15.88.
Staff and Reuters contributed to this report.