Rising oil prices and tumbling bank shares dragged Wall Street lower on Friday, with stocks surrendering the previous session's hefty gains.

Brent crude prices hovered near $116 a barrel as Libyan security forces began a violent crackdown on protesters in Tripoli and clashed with rebels near a major oil terminal.

Data earlier in the week had raised expectations about Friday's employment report, lifting stocks to their biggest gains in three months on Thursday. But after Friday's report showed February job gains roughly in line with expectations, investors quickly turned their focus to rising oil prices and Libyan unrest.

The (market) battle is: has the economy turned in a permanent way, or are higher oil prices going to slow everything down, said Bernie McGinn, president at McGinn Investment Management in Alexandria, Virginia.

The revolts in North Africa and the Middle East that have boosted crude prices, coupled with subdued client activity, could pressure first-quarter earnings of large U.S. banks, according to Bank of America Merrill Lynch. The brokerage downgraded shares of Citigroup Inc and Goldman Sachs Group Inc to neutral from buy.

Goldman fell 2 percent to $161.18 and Citi dropped 3.2 percent to $4.53. The KBW bank index <.BKX> lost 1.9 percent.

The Dow Jones industrial average <.DJI> lost 147.66 points, or 1.20 percent, to 12,110.54. The Standard & Poor's 500 Index <.SPX> fell 15.40 points, or 1.16 percent, to 1,315.57. The Nasdaq Composite Index <.IXIC> dropped 24.70 points, or 0.88 percent, to 2,774.04.

Volume was light, with about 4.15 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq so far in the session.

U.S. payrolls rose by 192,000 in February, slightly above the 185,000 gain expected by a Reuters poll, and the unemployment rate unexpectedly dipped to 8.9 percent from 9 percent.

Earnings and hours are not increasing, and people's paychecks are not really increasing, said Kim Caughey Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. Without more cash in your pocket, there's no way you can spend it.

Among consumer-related shares, the homebuilding sector was hurt the most. The PHLX housing index <.HGX> fell 1.8 percent with Weyerhaeuser down 2.5 percent to $23.51 and KB Home , Ryland Group and MDC Holdings all down about 3 percent.

(Reporting by Rodrigo Campos; Editing by Kenneth Barry)

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