NEW YORK - US shares took a beating on Friday as a warning from American Express about a weak economy highlighted worries about the financial sector despite a deal to rescue mortgage giant Countrywide.

The Dow Jones Industrial Average tumbled 246.79 points (1.91 per cent) to close at 12,606.30, as the market reversed course after a two-day rally.

The tech-dominated Nasdaq composite slumped 48.58 points (1.95 per cent) to 2,439.94 and the Standard & Poor's (S&P) 500 broad-market index retreated 19.31 points (1.36 per cent) to end at 1,401.02.

The news overshadowed a deal announced early on Friday by Bank of America to buy ailing Countrywide Financial in a four-billion-dollar stock swap that could bolster the nation's largest mortgage lender against a severe housing slump.

Fred Dickson at DA Davidson & Co said the market is worried that the worst is not over for the banking and financial sector, with Citigroup and Merrill Lynch poised to announce steeper writeoffs from mortgage losses.

This means the economic troubles are spreading from housing to banking to consumers, he said.

'As seen in the American Express announcement today, consumers now are having trouble paying their credit cards on time,' he said.

'The buyout of Countrywide does solve one major problem in the troubled home lending market, but others remain. Our sense is that there will be more bailout mergers of severely troubled mortgage lenders before this is over.'

The positive sentiment from Federal Reserve chairman Ben Bernanke's comments on Thursday that the central bank is ready to take 'substantive' steps to help growth, presumably with hefty rate cuts, was short-lived as traders focused on prospects for recession.

The financial sector was the main focus of trade.

American Express's stock led the downside, tumbling 10.2 per cent to 43.91 dollars after its warning that a weak economy will lead to more writeoffs and that it has adopted a more 'cautious' outlook.

Richard Jahnke at Briefing.com said the news from American Express was 'another sign of the spreading problems in the financial sector, and fueling concerns about an economic recession.'

Countrywide, which had spiked over 50 per cent on Thursday on reports of its pending deal, slid 18.3 per cent to 6.33 dollars after the buyout was announced by Bank of America, down 2.04 per cent at 38.50.

Merrill Lynch and Citigroup, both expected to report further writeoffs, managed to drift higher amid reports the two financial giants were looking for more foreign capital. Merrill rose 5.1 per cent to 54.69 and Citi added 1.6 per cent to 28.56.

Bonds rallied as investors looked for a safe haven.

The yield on the 10-year US Treasury bond fell to 3.810 per cent from 3.887 per cent on Thursday and that on the 30-year bond eased to 4.394 per cent against 4.444 percent.

Bond yields and prices move in opposite directions. -- AFP