The Nasdaq slid 15.64 to 2,028.43, and the Dow Jones industrial average dropped 66.49 to 10,623.64.
A volatile market caused by "triple-witching"--the simultaneous expiration of stock index futures, index options and individual stock options--had the Nasdaq swinging from below 2,000 to positive territory and back down to modest losses Friday morning.
A trio of economic reports gave conflicting evidence about the economy, but it was the sputtering manufacturing sector and its resulting shift in opinion about the Federal Reserve's next move that helped the Nasdaq up from steeper losses earlier in the day.
The main gauge of inflation, the Consumer Price Index, or CPI, rose more than expected in May, boosted by higher energy costs. The Labor Department said its CPI climbed 0.4 percent last month, faster than the 0.3 percent gain in April. The more important core CPI, which excludes food and energy costs, was more benign. It rose just 0.1 percent after a 0.2 percent gain in the prior month.
A report on consumer sentiment suggested Americans are still edgy about a slowing economy and rising layoffs. The University of Michigan's preliminary June index, which gives a first look on consumers' attitudes during the month, fell to 91.6 from 92 in May. The June figure was far above the 88.4 scored in April and was only slightly lower than consensus forecasts for 91.9.
According to a report on manufacturing, factories, mines and utilities operated at their slowest pace in more than 17 years this May. The Federal Reserve said U.S. industrial capacity in use fell to 77.4 percent, the lowest level since August 1983. Industrial production also slipped 0.8 percent, its eighth monthly fall in a row.
The declines were larger than economists had expected, showing that the manufacturing sector "continues to hemorrhage" according to Merrill Lynch analyst Bruce Steinberg.
But the news also helped shift Wall Street toward a rosier prediction for the Federal Reserve's next meeting on interest rates on June 27.
"Our economics department has just changed its forecast from a 25-basis-point to a 50-basis-point cut in fed funds as a result of continuing weakness in the manufacturing sector," Merrill Lynch analysts wrote in a Friday report.
In company news, Nortel said it will report a larger-than-expected loss in the second quarter and lay off an additional 10,000 workers. Shares were off 75 cents to $9.85.
"Here you have a company which has historically been one of the best in the sector taking an extraordinarily large charge and being unclear when they will return to profit," said David Meade, telecommunications credit analyst at Morgan Stanley. "Clearly that will push the equipment sector wider."
JDS Uniphase's fourth-quarter warning surprised analysts and investors, leading to a few downgrades and a steep drop in the fiber-optic company's stock Friday. Shares plunged $1.37 to $12.44.
Those two warnings helped drag the telecom-equipment sector down considerably. CNET's telecom-equipment index was off more than 4 percent for the day, with companies such as Ciena, down $4.53 to $40.14, and Lucent Technologies, down 44 cents to $6.31, making big contributions to the decline.
Bad news also crushed shares of 360networks. The company said that due to snowballing debt and little funding it will not make a $10.9 million interest payment due on its senior notes. Shares sunk 13 cents to 30 cents.
Among technology bellwethers, Amazon.com was down 80 cents to $12.49, AOL Time Warner rose 49 cents to $50.90 and Yahoo fell 46 cents to $16.01.
Cisco Systems fell $1.09 to $16.65, Intel rose 9 cents to $27.70 and Microsoft fell 91 cents to $67.99.
CNET Investor staff and Reuters contributed to this roundup.