By Walker SimonNEW YORK (Reuters) - Stocks fell sharply on Friday with the Dow closing below 12,000 for the first time since mid-March as rising oil prices and warnings of more mortgage-related write-downs at banks reignited investor fears of worse to come.Adding to the pessimism, S&P said it may cut its ratings on Ford Motor Co, General Motors and Chrysler LLC, citing financial damage from high gasoline prices. GM shares fell 6.8 percent and Ford tumbled 8.1 percent.Oil prices shot up 2 percent to $134.70 a barrel on Middle East tensions and a weak dollar, compounding already elevated fears about inflation and consumer spending.The session started on a negative note, as investors dumped commercial bank shares after Merrill Lynch said it sees dividend cuts and the need to raise more capital at Bank of America, Regions Financial, SunTrust Banks and Wachovia Corp.Shares of Merrill and other investment banks also took a hit as rumors circulated among traders that Merrill may give a profit warning and take additional write-downs on its mortgage holdings. Merrill's stock fell 4.6 percent to $35.95. A Merrill Lynch spokeswoman declined to comment."You have a number of issues starting with the continual write-down of subprime loans," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore."I think earnings reports for the second quarter are being looked at the lower end of (forecast) ranges," Mata said. "The effect of the oil situation has significantly affected the consumer, making them spend less outside of gasoline which they need to go from point A to point B."The Dow Jones industrial average closed down 220.40 points, or 1.83 percent, at 11,842.69. The Standard & Poor's 500 Index ended 24.90 points, or 1.85 percent, lower at 1,317.93. The Nasdaq Composite Index finished down 55.97 points, or 2.27 percent, at 2,406.09.For the week the Dow ended 3.8 percent lower, the S&P fell 3.1 percent and Nasdaq dropped 2 percent.The Dow closed at its second-lowest level this year and below 12,000 for the first time since March 10.All but one of the 30 Dow components ended in the red. Coca-Cola Co was the sole gainer, rising 0.6 percent to $53.66.In the mortgage-related sector, two Wall Street investment banks cut their earnings estimates for top U.S. home finance companies Fannie Mae and Freddie Mac, citing persistent erosion in U.S. housing and mortgage credit.The companies account for the issuance of most mortgage-backed bonds. Fannie Mae fell 4.8 percent to $23.81 and Freddie Mac lost 7.7 percent to $21.82.Leading the Dow percentage losers was General Motors, down $1.00 to $13.79. Rival Ford fell 51 cents to $5.81.Among financial stocks, Bank of America lost 3.7 percent to $27.10, and Wachovia fell 1.9 percent to $17.43.Adding to Friday's volatility was the quarterly expiration of June stock and stock index futures and options as investors offset or close out their positions at the last minute, traders said, describing what is termed as "quadruple witching.""Quadruple witching played a big part today because we are seeing heavy volume in the market overall as people unwind their June futures, options and stock positions," said Joe Kinahan, chief derivatives strategist at online brokerage in Chicago.(Editing by Leslie Adler)
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