Stocks slide on Syria fears; worst month for losses since May '12

Stocks dropped on the final trading day of August on Friday, with the Dow and S&P 500 posting their worst monthly declines since May 2012, as investors held off making large bets ahead of the Labor Day weekend amid escalating worries over Syria.

(Read more: Sell the Syrian threat, buy any action: Market pro)

"Pre-holiday markets are always thinly traded and subject to moves inspired by the stock index futures," wrote Elliot Spar, market strategist at Stifel Nicolaus. "We're probably in the mindset of 'who wants to be a hero in the face of a possible attack over the long weekend and I'd rather be a day late than wrong.' I guess when those that are waiting for some clarity to step up will have to chase."

The Dow Jones Industrial Average finished 30 points lower, dragged by Alcoa and Verizon.

The S&P 500 and the Nasdaq also ended in the red, falling nearly 2 percent each for the week. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose above 17.

Most key S&P sectors finished lower, led by consumer discretionary and techs, while consumer staples ended modestly higher.

The U.S. markets will be closed Monday for Labor Day.

President Barack Obama said that he has not made a final decision on a response to Syria's chemical weapons use, but that he is looking at limited action, not an open-ended commitment.

Obama's remarks follow a statement by Secretary of State John Kerry laying out the case for action against Syria. Kerry said the U.S. has "high confidence" that the Syrian regime used chemical weapons in last week's attack that killed 1,429 Syrians, including 426 children.

Equities initially sold off in a knee-jerk reaction, but quickly recovered from their lows.

"Starting off the speech, it was clear he was making a case for going forward with some sort of military campaign, and toward the end you understood it was something that's going to be done remotely with a shot across the bow effect rather than something lengthy with troops involved," said Mark Luschini, chief investment strategist at Janney Montgomery. "If it's brief, I think that is good for the markets, but time will tell once something does begin, what the response will be then."

On the economic front, consumer sentiment retreated to 82.1 in August from 85.1 July, according to the Thomson Reuters/University of Michigan's final reading on the overall index. Still, the final result topped an initial mid-month reading of 80.0 and exceeded economists' expectations for a final read of 80.5.

Meanwhile, consumer spending ticked up 0.1 percent in July, according to the Commerce Department. Economists polled by Reuters had expected a gain of 0.3 percent.

And business activity in the Midwest rose to 53.0 in August from 52.3 in July, according to the Institute for Supply Management-Chicago. A Reuters survey of economists on average expected a median reading of 53.0 in August versus the July figure of 52.3.

In Asia, shares closed mostly higher on Friday, but Japan's Nikkei 225 erased previous gains to end down 0.5 percent, after rising as much as 1.2 percent in early trade on upbeat economic data.