Wall Street sags for fifth day, heads for "fiscal cliff"

Stocks fell on Friday, putting the S&P 500 on track for a fifth straight decline, as President Barack Obama and top congressional leaders were set to make a last-ditch attempt to steer the country away from severe fiscal austerity next year.

Obama and lawmakers from both political parties will meet at the White House on Friday afternoon for talks in an effort to agree on a solution before a New Year's deadline to keep large tax hikes and spending cuts from taking effect, which could push the U.S. economy into a recession.

Trading was volatile and stocks rebounded from their session lows after unconfirmed reports that President Obama was about to offer a new plan to Republicans.

But investors' pessimism about achieving anything more than a stop-gap deal by the deadline was reflected in the benchmark S&P 500's drop of 1.3 percent so far this week. The broad index was on pace for its worst weekly performance since mid-November.

"There's a pretty good chance that we won't have something in hand by year-end," said Jonathan Golub, chief U.S. equity strategist at UBS, in New York. "It should be pretty obvious that that is now the majority case."

Golub, however, said investors were still counting on a deal that would avoid most of the tax hikes and spending cuts next year even if it does come after the deadline.

"It is widely believed that we're going to get a deal," he said. "We are not going to go over the cliff to the extent that we have a huge economic contraction."

With time running short, members of Congress may attempt to pass a retroactive fix to neutralize tax increases and spending cuts soon after the automatic fiscal policies come into effect on January 1.

The Dow Jones industrial average dropped 67.90 points, or 0.52 percent, to 13,028.41. The Standard & Poor's 500 Index fell 6.96 points, or 0.49 percent, to 1,411.14. The Nasdaq Composite Index lost 9.21 points, or 0.31 percent, to 2,976.61.

"It doesn't matter which side wins, but at this point, nobody wants to play a game where there aren't rules," said Joe Costigan, director of equity research at Bryn Mawr Trust, in Bryn Mawr, Pennsylvania.

"So everybody is talking about what the prospects are for changes in the rules. But at the end of the day, nothing is happening."

Highlighting Wall Street's sensitivity to developments in Washington, stocks tumbled slightly more than 1 percent on Thursday after Senate Majority Leader Harry Reid warned that a deal was unlikely before the deadline. But later the indexes rebounded after the U.S. House of Representatives said it would hold an unusual Sunday session to work on a fiscal solution.

With many investors away for the holiday-shortened week, volume is expected to remain light and that could exacerbate the market's swings.

Positive economic data failed to alter the market's downtrend.

The National Association of Realtors said contracts to buy previously owned U.S. homes rose in November to their highest level in 2-1/2 years, while a report from the Institute for Supply Management-Chicago showed business activity in the U.S. Midwest expanded in December.

Barnes & Noble Inc shares rose 5.7 percent to $15.17 after the top U.S. bookstore chain said British publisher Pearson Plc had agreed to make a strategic investment in its Nook Media subsidiary. But Barnes & Noble also said its Nook business will not meet its previous projection for fiscal year 2013.

Shares of magicJack VocalTec Ltd jumped 11 percent to $18.06 after the company, which provides VoIP or voice over Internet protocol services, forecast more than $39 million in GAAP revenue and over 70 cents per share in operating income for the fourth quarter. The company also said it has appointed Gerald Vento as president and CEO, effective January 1.

The U.S.-listed shares of Canadian drugmaker Aeterna Zentaris Inc surged 14.8 percent to $2.49 after the company said it had reached an agreement with the U.S. Food and Drug Administration on a special protocol assessment by the FDA for a Phase 3 registration trial in endometrial cancer with AEZS-108 treatment.

(Reporting by Edward Krudy; Editing by Jan Paschal)