U.S. stocks fell more than 1 percent in a truncated session on Friday as a possible debt default by a Dubai state-owned conglomerate led to fresh concerns about the global financial system.

The sell-off was broad, with selling concentrated mainly in the financial and commodity-linked sectors as investors trimmed positions in areas of the market most sensitive to economic uncertainty.

That hit stocks like aluminum producer Alcoa Inc , down 2.6 percent, and Bank of America , down 3 percent.

But after a slide of more than 2 percent at the open, the flight to less risky assets seemed to be subsiding, helping the major U.S. stock indexes ease back up off their lows. The U.S. dollar, which had jumped sharply as investors looked for a safe haven, pared gains and commodity prices stabilized.

The news out of the Middle East coincided with the desire by many investors to lock in 20 percent year-to-date gains in the S&P 500 after a terrible year in 2008.

It is at least an early indication of whether investors believe this is one-time bad news or the tip of something really bad, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. Right now, it looks like investors are taking the optimistic stance.

The Dow Jones industrial average <.DJI> dropped 154.48 points, or 1.48 percent, to end at 10,309.92. The Standard & Poor's 500 Index <.SPX> fell 19.14 points, or 1.72 percent, to 1,091.49. The Nasdaq Composite Index <.IXIC> lost 37.61 points, or 1.73 percent, to 2,138.44.

For the week, the Dow dipped 0.1 percent, while the S&P 500 edged up 0.01 percent and the Nasdaq slipped 0.4 percent.

Volume was light on the day after Thanksgiving. The U.S. stock market shut on Friday at 1 p.m. (1800 GMT), which was three hours shy of its normal closing bell, but the number of declining stocks still towered over those advancing.

On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt.

On Thursday, U.S. financial markets were closed for the Thanksgiving holiday. But financial markets around the world shuddered, reflecting fears about the impact of a potential Dubai debt default.

It was uncertain how much exposure U.S. banks have in Dubai. But influential bank analyst Richard Bove said in a note it does not appear that American banks have any major direct impact from this event.

Bank of America fell 3 percent, or 48 cents, to $15.47, while Citigroup tumbled 2.6 percent, or 11 cents, to $4.06. These two stocks were the most heavily traded on the New York Stock Exchange.

Commodity-linked stocks sold off sharply, but stabilized after the U.S. dollar pared gains and helped lift commodity prices off their session lows.

Even so, Dow component Alcoa Inc fell 2.6 percent, or 34 cents, to $12.66, while gold miner Newmont Mining Corp lost 2.8 percent, or $1.55, to $53.35.

The U.S. dollar rose 0.3 percent against a basket of currencies <.DXY>, after earlier climbing around 1 percent. U.S. crude oil futures for January dropped $2.18, or nearly 3 percent, to $75.78 a barrel.

Dow component Exxon Mobil Corp shares fell 2.1 percent, or $1.60, to $74.87 on the New York Stock Exchange.

Even retailers' stocks did not escape investors' concerns on Black Friday, which marks the unofficial start to the holiday shopping period.

An S&P index of retail stocks <.RLX> slipped 1.3 percent.

During the holiday shopping season, investors will watch for news about lines at store cash registers and insights into consumer spending, which accounts for about 70 percent of the U.S. economy.

Early indications were that while shoppers were out in force on Black Friday, they were being more selective with their purchases than they were before the recession hit in December 2007.

Shares of department store chain Macy's Inc fell 3.4 percent, or 59 cents, to $16.97. The S&P consumer discretionary index <.GSPD> fell 1.5 percent.

Volume was sparse on the New York Stock Exchange, where only about 654.83 million shares changed hands, far below last year's estimated daily average of 1.49 billion.

On the Nasdaq, about 963.73 million shares traded, well below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 6 to 1. On the Nasdaq, nearly five stocks fell for every one that rose.

(Reporting by Edward Krudy; Editing by Jan Paschal)

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