Corrects in penultimate paragraph to read that business activity expanded in the U.S. Midwest, not United States

NEW YORK - Stocks fell on Friday as shares of Goldman Sachs tumbled on reports of a federal probe into the Wall Street powerhouse and after first-quarter gross domestic product came in weaker than expected.

The S&P financial index lost 1.3 percent, with Goldman down 7.6 percent to $148.12. A federal investigation raised the possibility of criminal charges less than two weeks after Goldman was accused of civil fraud. Bank of America-Merrill Lynch downgraded the stock to neutral.

The Goldman news could lead investors to believe that there will be more intensive regulation than before, which could put a bit of a dampening effect on financials in general, said Michael Sheldon, chief market strategist, RDM Financial, Westport, Connecticut.

A multibillion-euro aid package for debt-laden Greece will be hammered out within days and could keep a sovereign debt crisis from spreading, a top European Commission official said. Fears over a debt default have weighed on equities in recent weeks.

Gross domestic product expanded at a 3.2 percent rate in the quarter, the Commerce Department said in its first estimate, below the 3.4 percent forecast of analysts.

The Dow Jones industrial average <.DJI> was down 44.89 points, or 0.40 percent, at 11,122.43. The Standard & Poor's 500 Index <.SPX> was down 8.42 points, or 0.70 percent, at 1,198.36. The Nasdaq Composite Index <.IXIC> was down 17.61 points, or 0.70 percent, at 2,494.31.

Losses in the Dow were limited after component Chevron Corp rose 0.1 pct to $82.33 as it reported a sharp increase in quarterly profit.

Both Coventry Health Care Inc and Newell Rubbermaid Inc posted quarterly earnings that beat expectations and raised their outlooks. Coventry fell 1.9 percent to $24.42 while Newell advanced 3.2 percent to $17.50.

Chevron's revenue looked a little light, but in general this has been an extremely strong season for earnings, Sheldon said.

UAL Corp gained 4.2 percent to $22.37, while Continental Airlines Inc added 1.5 percent to $23.02. UAL's United Airlines and Continental have agreed to a deal to create the world's largest carrier, a source said.

In the latest economic data. business activity in the U.S. Midwest expanded more than expected in April, with the Institute for Supply Management-Chicago business barometer jumping to 63.8 in April, the highest since April 2005.

Separately, U.S. consumer sentiment fell in April from the month before, but were better than expectations as consumers saw the economic recovery well under way but painfully slow.

(Editing by Jeffrey Benkoe)

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