Stock futures dropped more than 1 percent on Friday after a Republican proposal for averting the "fiscal cliff" failed to pass, dissipating hopes that a deal would be reached soon in Washington.
Trading is expected to be volatile as investors view a fiscal agreement between the White House and Republicans before the year-end as increasingly unlikely. With trading thin ahead of the holidays, market swings will probably be amplified. CBOE VIX front-month futures, a measure of volatility, rose 5.7 percent.
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Late on Thursday, Republican House Speaker John Boehner conceded there were insufficient votes from his party to pass a tax bill, dubbed "Plan B," to help avert the cliff, tax hikes and spending cuts due to start in January that could tip the economy into recession.
Boehner said he would hold a press conference at 10:00 a.m. ET (1500 GMT), during which he is expected to discuss the vote.
Plan B had called for tax increases on those who earn $1 million a more a year, a far smaller slice of taxpayers than President Barack Obama had asked for.
The bill's failure suggested it would be difficult to get Republican support for the more expansive tax increases Obama has urged, making it less likely an agreement will be reached before the end of the year.
"We had been moving in the right direction, but now we need a different deal, and if this radical group of Republicans is so intransigent that they won't do any deal, it will be very difficult," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.
Investors had previously considered such an outcome unlikely. The decline implied by futures on Friday would wipe out most of the week's equity gains, which buoyed the S&P 500 close to two-month highs.
Banking and energy shares, which outperform in times of economic expansion and have led the market on signs of progress with the fiscal impasse, could be the most vulnerable to any setback. February crude futures dropped 1.3 percent in early trading on Friday.
S&P 500 futures sank 20.9 points, or 1.5 percent, and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 184 points and Nasdaq 100 futures slid 43.25 points.
The S&P 500 is up about 1.8 percent this week, boosted by signs of progress in the fiscal negotiations between Obama and Boehner earlier in the week.
So far in 2012, the index has gained 14.8 percent, though uncertainty over the cliff may prompt many traders to lock in gains as the year draws to a close.
Orders for durable goods rose 0.7 percent in November, more than expected, while personal income and spending were also higher than forecast.
However, mirroring trading on Thursday, when strong economic growth and home sales figures failed to excite investors who were focused on the budget negotiations, futures didn't react to the data.
The Thomson Reuters/University of Michigan's final December consumer sentiment survey is due at 9:55 a.m., and is expected to come in at 74.7, compared with a prior reading of 74.5.
Nike Inc rose 3.5 percent to $102.50 in premarket trading after reporting second-quarter earnings that handily beat expectations Thursday on strong demand in North America. Software distributor Red Hat Inc posted third-quarter revenue that beat expectations.
U.S.-listed shares of Research in Motion slumped 14 percent to $12.20 in premarket trading. The company reported its first-ever decline in its subscriber numbers Thursday and outlined plans to transform the way it charges for its BlackBerry services.
(Editing by Bernadette Baum)