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NEW YORK (AP) — The fear on Wall Street is that nervous consumers are going to short-circuit the economic recovery.

Stocks fell sharply Friday, with the major indexes all dropping more than 1.5 percent, after investors were disappointed by media reports that the Reuters/University of Michigan index of consumer sentiment fell significantly short of expectations for the first part of August. That's a sign consumers may well keep cutting back their spending as they worry about losing their jobs. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported an unexpected decline in retail sales. Investors were able to shake that off, but Friday's consumer sentiment number had them bailing out of stocks, jeopardizing a summer rally that had lifted the Standard & Poor's 500 index more than 15 percent in about a month.

Investors also sold off oil and other commodities and moved their money into the relative safety of the dollar and government bonds. Treasury prices jumped, sending their yields lower, while the dollar rose against other major currencies.

After rallying for months on expectations of an economic recovery, investors are worried that they were too optimistic, given consumers' continuing reluctance to spend.

"Valuations were beginning to price in a sunnier a future, but not all the data is sunny yet," said Lawrence Creatura, portfolio manager at Federated Clover Capital Advisors, referring to stock prices. "There is still going to be a tug of war between good news and bad news as we move through the coming months."

In midafternoon trading, the Dow Jones industrial average fell 137.78, or 1.5 percent, to 9,260.41.

The S&P 500 index fell 15.27, or 1.5 percent, to 997.46, while the Nasdaq composite index fell 37.30, or 1.9 percent, to 1,972.05.

About four stocks fell for every one that rose on the New York Stock Exchange, where volume came to a light 605.9 million shares. Light volume can exaggerate the market's movements.

In other trading, the Russell 2000 index of smaller companies fell 16.18, or 2.8 percent, to 559.01.

Bond prices rose sharply. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.55 percent from 3.62 percent late Thursday. The drop in the 10-year yield is good news for consumers because it is closely tied to interest rates on mortgages and other loans.

On the New York Mercantile Exchange, gold and other metals prices fell, while oil prices sank $2.65 to $67.87 a barrel.

The declines in stocks Friday hurt the market's chances at stretching its summer rally to a fifth week of gains. Going into Friday's session, the S&P 500 index had regained 15.2 percent in little more than a month and 49.7 percent since falling to a 12-year low in early March.

Investors have sent markets higher this summer encouraged by improvements in housing, manufacturing and corporate profits. But without the support of the consumer, the economy's recovery is in question.

"I think you're going to need to see a material stabilization in labor markets before you get meaningful and stable consumer confidence," said Stephen Wood, chief marketing strategist at Russell Investments. "And we're certainly not adding jobs and we're not even at a point where jobs are no longer being lost."

Stocks fell across the board, with the biggest losses among financial, energy and material companies — industries that posted some of the biggest gains in recent days. Losses weren't as steep in more defensive areas like consumer staples and utilities, which tend to hold up better when the economy is weak.

Sluggish sales and a cautious outlook from J.C. Penney Co. added to the market's gloom. Chairman and CEO Myron E. Ullman III told investors in a conference call Friday, "The consumer is further behind the recovery than the statistics would indicate." Penney's shares tumbled more than 6 percent, falling $2.16 to $31.18.

Bucking the trend, shares of BB&T Corp. jumped more than 6 percent after a report in The Wall Street Journal said the regional bank had reached an agreement with the Federal Deposit Insurance Corp. to buy the deposits and branches of struggling Colonial BancGroup Inc. BB&T shares rose $1.77 to $27.57, while Colonial shares tumbled 6 cents, or 12.8 percent, to 41 cents.

Stocks have had a rocky few days, falling in the early part of the week amid anxiety over what the Federal Reserve would say about the economy at the end of a two-day policy meeting. The market turned higher on Wednesday after the Fed reassured investors with a more positive stance on the economy than in the past. The market's gains spilled over into Thursday.

But on Friday, all the major indexes nearly erased their gains from the previous two days and headed toward losses of about 1 percent for the week due to the disappointing news on consumers.

Analysts said the market is likely to shift between positive and negative territory in the near term as investors try to determine just how strong the economy's recovery will be.

"This week was a great example of what will likely occur for the rest of the year," said Greg Reynholds, a vice president at Lenox Advisors. "Day by day, week by week, month by month we're going to have to try to find direction through this data jungle."

In other economic news Friday, the Labor Department said the Consumer Price Index was flat in July after a slight increase in June. That had little effect on stocks but did help bond prices.

Wall Street also shrugged off a report showing a bigger-than-expected increase in industrial production as investors have come to expect an improvement in manufacturing.

Overseas, Asian markets were mostly higher, with Japan's main index hitting a ten-month high amid mounting optimism about a global economic recovery. The Nikkei stock average rose 0.8 percent.

European markets gave up early gains and finished lower. Britain's FTSE 100 dropped 0.9 percent, Germany's DAX index fell 1.7 percent, and France's CAC-40 lost 0.8 percent.