* Government stake in Citi spurs dilution worries
* Healthcare down for 2nd straight session on Obama plan
* U.S. economy shrinks at 6.2 pct annual rate in 4th qtr
* Dow off 1.7 pct, S&P 500 off 2.4 pct; Nasdaq off 1.0 pct
(Recasts lead, adds context to S&P 500)
By Chuck Mikolajczak
NEW YORK (Reuters) - U.S. stocks fell and the S&P
500 marked its worst-ever start to a year Friday, after the
government said it will take a large stake in Citigroup's
common shares, fanning fears it will increase its role in other
The decline closed out a grim month on Wall Street, with
the Dow industrials hitting the lowest level since May 1997 as
the blue-chip index fell for a sixth straight month.
Healthcare and drug companies, such as Merck & Co
and Johnson & Johnson Inc, fell for a second day on
Friday on worries that President Barack Obama's budget
proposal will strangle profits as the administration tries to
rein in healthcare costs.
Data showing the U.S. economy shrank at an annual rate of
6.2 percent last quarter also weighed on the market.
Citigroup shares tumbled 39 percent after the
government said it will convert up to $25 billion in the bank's
preferred shares to common stock in a move that could dilute
existing shareholders' ownership by 74 percent. The S&P
financial index sank 8.1 percent.
"There are continued beliefs that Citibank is not the last
bank that the government will take a large stake in," said
William Lefkowitz, options strategist at brokerage firm
vFinance Investments in New York.
"Some people believe that if the government takes a 30 to
40 percent stake, which they did in Citibank, that would be
considered some form of nationalization," he said.
The Dow Jones industrial average dropped 119.15
points, or 1.66 percent, to 7,062.93. The Standard & Poor's 500
Index fell 17.74 points, or 2.36 percent, to 735.09. The
Nasdaq Composite Index slipped 13.63 points, or 0.98
percent, to 1,377.84.
Friday's close marked the lowest level for the S&P 500
since December 1996.
The S&P 500 is down 18.62 percent since the start of the
year, its worst two-month start on record.
U.S. stocks have lost $10 trillion since peaking in October
For the week, the Dow fell 4 percent, the S&P 500 slid 4.5
percent and the Nasdaq dropped 4.4 percent.
For the month, the S&P fell 11 percent and the Nasdaq shed
6.7 percent. The February decline for the S&P 500 was the
second worst on record, after an 18.4 percent slide in 1933
during the height of the Great Depression.
Among health-care companies, Johnson & Johnson fell 4.7
percent to $50 and Merck slid 7.1 percent to $24.20 on Friday.
Both companies are Dow components.
General Electric, which operates a large financing
unit, slid after it said it would slash its dividend by 68
percent to 10 cents a share in order to conserve cash. GE
shares fell 6.5 percent to $8.51.
"It's a sign that all of these firms with significant
finance exposure are needing to do what they can to preserve
capital," said Peter Jankovskis, director of research at
OakBrook Investments LLC in Lisle, Illinois. "In the short run
that is something equity holders will have to get used to."
The KBW Bank index dropped 8.7 percent.
On Nasdaq, biotech companies Celgene and Gilead
Sciences were the top drags, falling 8.2 percent and
4.8 percent, respectively. The AMEX Biotechnology index
shed 3.8 percent.
With Friday's decline, the S&P 500 marked its fifth down
month out of six and the biggest drop since October.
Trading was heavy on the New York Stock Exchange, with
about 2.25 billion shares changing hands, above last year's
estimated daily average of 1.49 billion, while on Nasdaq, about
2.45 billion shares traded, above last year's daily average of
Declining stocks outnumbered advancing ones on the NYSE by
2 to 1 while decliners beat advancers on the Nasdaq by about 3
(Additional reporting by Doris Frankel in Chicago; Editing by