Anxiety over Washington's failure so far to resolve an impasse over raising the debt ceiling put pressure on U.S. stocks, which were already staggered by news on Friday that the economy slowed more than expected in the first half of the year.
Stocks ended lower with the Dow Jones industrials average posting its sixth straight day of losses. Trading was volatile. Gold soared as investors sought a safe haven amid the uncertainty. It was the worst week in a year for stocks.
President Barack Obama briefly soothed the market's fears earlier in the session by saying that there are "plenty of ways out of this mess." His statement helped pulled shares from their lows of the day.
Obama vowed that he would work through the weekend with Democrat and Republican leaders to craft a deal. But he also warned in remarks from the White House: "We're almost out of time."
By the time markets closed, the Republican-led House and the Democratic-led Senate were trying to move ahead with separate measures to raise the U.S. government's $14.3 trillion debt limit. Time was running out, though, and the Aug. 2 deadline loomed for landing a deal before the U.S. begins to run short on cash and cannot pay some of its bills.
The Dow Jones industrial average dropped 96.87 points, or 0.79 percent, to 12,143.24. The Standard & Poor's 500 Index fell 8.39 points, or 0.65 percent, to 1,292.28. The Nasdaq Composite Index lost 9.87 points, or 0.36 percent, to 2,756.38.
The U.S. economy came perilously close to flat-lining in the first quarter and grew at a meager 1.3 percent annual rate in the April-June period as consumer spending barely rose.
The Commerce Department data on Friday also showed the current lull in the economy began earlier than had been thought, with the growth losing steam late last year.
The euro zone debt crisis was also a concern to markets. Rating agency Moody's put Spain on review for a possible downgrade on Friday, adding to worries that a Greek rescue package has done little to halt the spread of Europe's debt crisis.
Chevron Corp , the second-largest U.S. oil company, reported a 43 percent jump in quarterly profit, beating estimates as strong oil prices and fatter refinery margins offset a drop in oil output.