Stocks fell sharply Friday as oil held close to a record high, prompting investors to shrug off mostly upbeat government data on durable goods and new home sales.

The Dow, the Standard & Poor's 500 index and the Nasdaq Composite all posted their worst weekly percentage declines in more than two months.

The Dow Jones industrial average (search) tumbled 123.60 points, or 1.19 percent, to end at 10,297.84. The Standard & Poor's 500 Index (search) dropped 9.16 points, or 0.76 percent, to close at 1,191.57. The technology-laced Nasdaq Composite Index (search) lost 17.39 points, or 0.84 percent, to finish at 2,053.27.

For the week, the Dow fell 3.06 percent, the S&P 500 declined 2.09 percent and Nasdaq was off 1.76 percent.

Investors overlooked decent economic news, choosing instead to focus on oil. Transportation and manufacturing companies — considered the most oil-dependent — were hardest hit, though the selling was spread throughout the market as crude oil futures threatened to top the psychologically significant $60-per-barrel barrier for the second day in a row.

U.S. crude futures settled up 42 cents to $59.84 a barrel, having earlier touched $60 to match Thursday's record — the highest since the New York Mercantile Exchange (search) began trading it in 1983.

Rising oil prices are generally negative for stocks, as they increase companies' expenses and reduce consumers' discretionary spending.

"The crude situation is a big concern right now," said Brian Williamson, an equity trader at The Boston Company Asset Management. "People aren't really looking at the economic numbers."

Shares of Dow industrial companies that are benchmarks of the U.S. economy fell as oil prices advanced, with heavy-equipment maker Caterpillar (CAT) losing 1.6 percent, or $1.61, to $96.86 and chemicals maker DuPont Co. (DD) sliding 1.7 percent, or 75 cents, to $44.68.

Shares of Dow component Wal-Mart (WMT) , the world's biggest retailer, slipped 1 percent, or 51 cents, to $47.37 and Target Corp. (TGT) the No. 2 U.S. discount retail chain, fell 1.7 percent, or 96 cents, to $54.07. Soaring energy prices hurt discount chains because the stores cater to lower-income shoppers who are spending a larger portion of their budgets on gasoline.

"It is disconcerting to see oil hover around $60 a barrel. But this could be a resistance level, and if you think oil prices will go beyond $60 a barrel, it makes you nervous," said Neil Massa, senior trader at John Hancock Funds.

The bond market reflected investors' uncertainty, making substantial gains as stocks dropped. The yield on the 10-year Treasury note fell to 3.92 percent, down from 3.96 percent late Thursday. The dollar fell against most major currencies and gold prices also lost ground.

Also adding some volatility to the market, institutional investors were adjusting their portfolios to reflect the annual rebalancing of the Russell indexes.

The Commerce Department (search) reported 5.5 percent rise in orders to U.S. factories for big-ticket manufactured goods last month, largely due to a huge jump in demand for commercial aircraft. It was the fastest pace of growth in durable goods orders in 14 months, and far exceeded the 1.9 percent increase forecast by economists.

Excluding the volatile transportation sector, however, durable goods orders fell by 0.2 percent in May, the third decline in the past four months. Economists have worried that soaring oil prices could harm the health of the manufacturing sector, which has rebounded since the 2001 recession.

Also in May, sales of new homes climbed to the second highest level in history, but median home prices fell sharply. The government reported that sales of new single-family homes rose by 2.1 percent last month to a seasonally adjusted annual rate of 1.3 million homes, but the median cost dropped 6.5 percent to $217,000.

However, the economic data simply wasn't positive enough — or broad enough — to make a dent in investors' pessimism over the future effects of higher crude prices.

"People need a good reason to buy stocks, but they always have reasons to sell," said John Waterman, chief investment officer at Rittenhouse Asset Management. "We're seeing mixed economic data, high oil prices, so where do you put your money? Investors chase momentum, and there's none here."

Citigroup Inc. (C) was up 7 cents at $46.95 after the world's largest financial services firm announced a $3.7 billion deal to swap most of its asset-management business for the broker-dealer business of Legg Mason Inc., as well as Legg Mason stock and a loan to the Baltimore financial-services firm. Legg Mason gained 15.3 percent, or $13.01, to $98 on the news.

Guidant Corp. (GDT) sank 6.9 percent, or $4.70, to $63.90, after the medical devices maker warned doctors to avoid implanting certain defibrillator models due to manufacturing defects. The company has also alerted the Food and Drug Administration, which may classify the action as a recall.

A severe decline in the price of computer memory chips pushed Micron Technology (MU) to its largest quarterly loss in two years, sending its shares down 2.3 percent to $10.58 on the New York Stock Exchange. The Philadelphia Stock Exchange's semiconductor Index fell 1.9 percent.

Unocal Corp. (UCL) added 66 cents to $65.68 after the Chinese state-owned oil company CNOOC Ltd., which made an unsolicited $18.5 billion offer for the oil company on Thursday, said it was willing to discuss selling some Unocal assets and putting others under American management. The announcement came after four members of Congress called on the U.S. government to review the security implications of the proposed deal. Rival bidder Chevron Corp. gained 22 cents to $57.55.

Volume was active, with 2.04 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. On Nasdaq, about 2.39 billion shares traded — above the 1.81 billion daily average last year.

The Russell 2000 index, which tracks smaller company stocks, was down 3.72, or 0.59 percent, at 630.40.

Overseas, Japan's Nikkei stock average slipped 0.34 percent. In Europe, France's CAC-40 fell 0.95 percent, Britain's FTSE 100 declined 0.69 percent and Germany's DAX index was down 1.32 percent.

Reuters and the Associated Press contributed to this report.