Stocks tumbled Friday under the weight of a surprisingly poor jobs report for December and negative brokerage calls on phone companies.

The Dow Jones industrial average (search) ended down 133.55 points, or 1.26 percent, at 10,458.89, its biggest single-day percentage drop since October 2003. The Standard & Poor's 500 Index (search) fell 10.06 points, or 0.89 percent, to 1,121.86, its biggest such fall since mid-November of last year. The technology-laden Nasdaq Composite Index (search) fell 13.33 points, or 0.63 percent, to 2,086.92.

For the week, the Dow gained 0.5 percent, while the Nasdaq jumped 4 percent and the S&P 500 advanced 1.2 percent.

Before the market opened, the Labor Department (search) reported that the nation's unemployment rate dropped to 5.7 percent in December, but that companies added only 1,000 new jobs in an anemic holiday-hiring performance. Analysts had been expecting a gain of 100,000 to 150,000.

"It's certainly negative for market sentiment," said Edgar Peters, chief investment officer at PanAgora Asset Management. "The 1,000 jobs is like no jobs, and people seem to consider that an important indicator of the recovery."

The market held up relatively well through the day despite the report, but late in the day, "investors threw in the towel ... and everyone was taking profits," said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee.

Although December's unemployment rate was the lowest in 14 months, it reached that level because fewer people were looking for work, the department said. More than 300,000 people gave up their search for jobs and dropped out of the pool of available workers, the department said.

Job creation is watched closely as a measure of the depth of the economic recovery from the 2001 recession and of consumer finances. Consumer spending makes up two-thirds of the economy. The jobs report also suggests that the Federal Reserve is likely to keep interest rates lower longer to stimulate the economy.

The markets took little comfort from the Bush administration announcement that it was lowering the national terror alert level to "yellow" from "orange." Homeland Security Secretary Tom Ridge said that an urgent threat had passed.

The bond market responded strongly to the likelihood that interest rates will remain low, with the yield on the 10-year Treasury note falling to 4.082 percent from 4.25 percent late Thursday.

Shares of International Business Machines Corp. (IBM) fell a day after the computer hardware company said federal investigators are considering civil charges for accounting rule violations.

IBM said the Securities and Exchange Commission was looking into the transactions as part of a larger probe into Dollar General Corp.'s accounting. The Tennessee-based chain of retail stores has admitted overstating profits by $100 million from 1998 to 2000.

IBM was down $1.83, or nearly 2 percent, at $91.21, while Dollar General dropped 22 cents, or 1 percent, to $21.45.

Telecommunications operators SBC Communications (SBC) and AT&T (T) were the blue-chip Dow's biggest percentage losers, after they were each downgraded by leading brokerages.

Shares of AT&T Corp., the largest U.S. long-distance telephone company, fell almost 4 percent, or 83 cents, to $21.15 after Deutsche Bank Securities cut its rating on the company to "sell" from "hold."

SBC Communications Inc. also fell, after Merrill Lynch cut its rating on the company to "sell" from "neutral."

Shares of SBC, the No. 3 U.S. local telephone company, fell $1.14, or 4 percent, to $26.45. In a research report, Merrill cited SBC's recently appreciated stock price, challenging growth prospects and continued pressure on its profit margins for the downgrade.

Lucent Technologies Inc. (LU) topped the New York Stock Exchange's most actively traded list, after investment bank Morgan Stanley cut its rating on the company to "equal-weight" from "overweight." Shares of the telecommunications equipment maker fell 15 cents, or 3.9 percent, to $3.87.

Alcoa Inc. (AA) , another Dow member, dropped 75 cents, or 1.9 percent, to $37.91. The aluminum producer posted a quarterly profit that beat expectations, but analysts said the company reaped $105 million in gains from insurance settlements, among other one-time items they said should be subtracted from earnings.

Major oil companies fell on Friday, after Anglo-Dutch oil company Royal Dutch/Shell Group (RD) shocked investors by slashing its "proven" reserves 20 percent, raising concerns others may also have improperly booked reserves.

Royal Dutch's U.S.-listed shares sank 7.9 percent, or $4.15, to $48.61 and were among the New York Stock Exchange's most actively traded issues.

The news unnerved investors who worried Shell's partners in some projects might also announce revisions. Shares of ChevronTexaco Corp. (CVX), a part owner and operator of the Gorgon gas field in Australia identified by Shell as a problem, fell 1.1 percent, or 93 cents, to $85.12.

Exxon Mobil Corp. (XOM), a Dow component and another owner of Gorgon, lost 61 cents, or 1.5 percent, to $40.29.

Separately, a survey of consumer confidence conducted by AP-Ipsos indicated that confidence remained strong in early January. The index climbed to the highest level since May 2002, far above its low point in February 2003, a month when Americans' anxieties were rising right before the start of the Iraq war.

The January reading of 100.1 in the AP-Ipsos survey compared with a December reading of 100 and a weak confidence reading of 61.5 last February.

Volume was heavy, with about 1.66 billion shares changing hands on the New York Stock Exchange, where advancers and decliners were roughly equal in number. On the Nasdaq, more than 2.47 billion shares were traded, and decliners outnumbered gainers by a ratio of 19 to 13.

The Russell 2000 index of smaller companies dropped 4.42, or 0.76 percent, to 575.20.

Overseas, Japan's Nikkei stock average closed up 1.18 percent. Major European exchanges registered declines: Britain's FTSE 100 dropped 0.62 percent, Germany's DAX index was down 0.72 percent, and France's CAC-40 was off by 0.50 percent.

Reuters and the Associated Press contributed to this report.