Some investors feared the increase might present an obstacle to further attempts by the U.S. central bank to inject liquidity into tight credit markets, reports said.

The Dow Jones industrial average lost 178.11 points, or 1.32 percent, to close at 13,339.85. The Nasdaq composite was down 32.75, or 1.23 percent, at 2,635.74. The Standard and Poor's 500 Index dropped 20.46, or 1.37 percent, at 1,467.95.

Volume on the New York Stock Exchange was 701 million shares traded, with 813 stocks advancing and 2,294 declining.

Crude oil prices had their second straight losing day, dropping 96 cents to $91.27 a barrel at the New York Mercantile.

Bonds dropped. The 10-year Treasury note fell 6/32, or $1.88 per $1000 invested, to yield 4.24 percent Friday.

The dollar gained. The euro traded at $1.4435 from $1.4625 late Thursday, while the dollar changed hands at 113.37 yen from 112.22 yen.