Stocks fell in Europe and Asia after renewed fears over the U.S. economy soured market sentiment, and raised questions about how, or whether, the Federal Reserve would be able to fend off recession. There are growing fears the U.S. may be entering a period of stagflation for the first time since the 1970s. Stagflation is a period of slowing growth and rising inflation. Overseas, Japan's Nikkei stock average closed down 1.37 percent. In afternoon trading, Britain's FTSE 100 fell 0.35 percent, Germany's DAX index was down 1.07 percent, and France's CAC-40 dropped 1.37 percent.

Investors have been reassured by the central bank's statements that it will lower rates as needed, but that expectation hasn't been enough to boost confidence in the stock market. Wall Street remains concerned that the economy could be so weak that rate cuts, which take months to work their way through the economy, won't prevent further deterioration.

The Fed's next rate setting meeting is on March 18.

In corporate news, government-sponsored mortgage provider Freddie Mac was downgraded to "sell" by Merrill Lynch on fears it faces continued headwinds amid the credit crisis.

Software maker Intuit Inc. may come under pressure after it posted late Thursday a 21 percent decline in second-quarter profit. Handset maker Motorola Inc. could gain after it named private equity executive Paul Liska as chief financial officer, effective March 1.