JPMorgan Chase's disappointing fourth-quarter earnings also weighed on the market.
The Dow Jones industrial average (INDU) dropped 49 points, or 0.4%, the S&P 500 (SPX) fell 6 points, or 0.5%, and the Nasdaq composite (COMP) lost 14 points, or 0.5%.
While solid demand at recent debt auctions in Italy and Spain calmed some investors, chatter that S&P could downgrade several eurozone countries at some point Friday sparked a fresh bout of worries.
While the market has been anticipating S&P's downgrades given the rating agency's warning, the actual news is still a harsh reminder for investors who have grown optimistic about Europe moving toward a solution.
"Investors have been getting more confident, and the market has had some positive momentum on hopes that Europe is making some headway," said Chris Kichurchak, vice president at Strategic Wealth Partners. "The downgrades would bring us back to the reality that the financial world is a messed-up place right now."
The euro fell to a 17-month low against the dollar to around $1.26. The dollar also rose against the British pound and the Japanese yen.
Oil for February delivery fell 40 cents to settle at $98.70 a barrel.
Gold futures for February delivery fell $16.90 to settle at $1,630.80 an ounce.
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