Stocks retreated on Friday after two days of gains as wealthier nations appeared to pull back from a European Union plan to broaden funding for a plan to deal with the region's sovereign debt crisis.

German Chancellor Angela Merkel said hardly any countries in the Group of 20 industrialized nations are willing to participate in the euro zone bailout fund, throwing cold water on plans to stabilize Europe's sovereign debt crisis.

Labor Department data showed U.S. hiring slowed in October but the unemployment rate hit a six-month low and job gains in the prior two months were stronger than previously thought, pointing to some improvement in the still-weak labor market.

Point one right now is clearly the Greek situation because that thing has got to be resolved very soon or else there will be issues that we are not going to care to address, said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.

We are all absolutely transfixed by this and it has overcome the jobs report today, which was mildly encouraging but again nothing to write home about.

The PHLX Europe sector index, which includes major European shares, dropped 2.9 percent.

Financial shares also slumped, with the KBW capital markets index down 2 percent.

Shares of Jefferies Group Inc lost 4.9 percent after brokerage Keefe, Bruyette & Woods cut Jefferies target price but said the investment bank is being unjustly punished over perceived exposure to the European debt crisis.

The focus on developments from Europe has kept stock trading volatile, with the S&P 500 index swinging more than 1.5 percent every day this week. The index is on track to post its first negative week in five after closing on Monday with its best month in 20 years.

The Dow Jones industrial average dropped 141.56 points, or 1.18 percent, to 11,902.91. The Standard & Poor's 500 Index fell 14.57 points, or 1.16 percent, to 1,246.58. The Nasdaq Composite Index declined 21.18 points, or 0.79 percent, to 2,676.79.

In a move to make its deficit targets credible, Italy agreed to have the International Monetary Fund monitor the country's progress with long delayed reforms of pensions, labor markets and privatization. Italy's debt burden could be the market's next target after a resolution of Greece's finances.

Shares of daily deals site Groupon Inc rose more than 50 percent in their stock market debut, but at least some of the early trading exuberance may have come from limiting the fraction of the company that was sold.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

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