NEW YORK -- This was the sideswipe investors had feared.

The stock market is in the middle of one of the great rallies of a generation, but for weeks there has been a nagging fear that bad news was never far off. The news came from Dubai, a wealthy Middle Eastern city-state that many Americans probably couldn't find on a map. Concerns that a government-backed investment company risked defaulting on $60 billion in debt ripped through world markets and served as a reminder of how fragile the financial system remains a year after it nearly collapsed.

The Dow Jones industrial average slumped nearly 155 points Friday before trading ended three hours early because of the Thanksgiving holiday. The broad retreat from riskier assets pushed Treasury prices higher. The dollar gained against most other major currencies and commodities tumbled.

Now the question that will dog investors over the weekend is whether the markets will shrug off a financial crisis in the Middle East or seek protection in more conservative investments. That could end a rally that has seen the Dow surge 57.5 percent since March 9.

Stocks ended well off their lows, but analysts cautioned that the shortened day and scarcity of traders meant the real test for the markets will come next week as traders return from long weekends.

The day's gyrations made clear that investors who might have been buying up stock in the past eight months remain on edge about faults in the financial system and the economy.

Worries about bad debt are fresh in investors' minds after the collapse of the U.S. brokerage Lehman Brothers in September last year kicked the U.S. economy deeper into recession overnight as banks halted lending on fears about the extent of bad loans.

The latest concern is that problems in Dubai, which has drawn wealthy tourists and investors from around the globe in the past decade with its Las Vegas-in-the-Middle East appeal, could imperil a nascent economic rebound around the world. This could happen if banks suffer big losses or confidence falters.

"The biggest risk is a domino effect," said Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend Fund in Purchase, N.Y.

The latest trouble on Wall Street comes as the U.S. kicks off the unofficial start to the holiday shopping season. Investors will be tracking news from retailers for insights into how much consumers will spend in the coming month. Consumer spending is the biggest driver of the U.S. economy.

Stocks are still up sharply for the month and the year.

Analysts were divided over whether Dubai's problems meant more trouble was to come. Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said U.S. investors were given a chance to digest the news with markets closed on Thanksgiving. Reports of Dubai's problems surfaced during trading Wednesday and drew little initial reaction.

"It was like we were in a coma for a day and awoke and the worst had passed," he said.

In the past, financial time-bombs have been hard to detect. The subprime mortgage crises that helped tip the U.S. into recession began with small pops that grew louder as the extent of the problems with debt became clear.

The worries about Dubai erupted amid a period of relative calm in U.S. markets. The Chicago Board Options Exchange's Volatility Index, known as the market's fear index, rose more than 4 percent. On Wednesday it fell to its lowest level since August 2008 after jumping to a record in October last year around the height of the financial crisis. A drop in the VIX signals investors aren't as worried about big swings in the market.

The latest test of the market still leaves major stock indicators up more than 4 percent for the month, so analysts said some selling was due. The S&P 500 index is up 61.3 percent from a 12-year low in March.

Trading volume in November has been light as many professional investors have pulled back from markets in hopes of locking in big gains for 2009.

Dave Rovelli, managing director of trading at brokerage Canaccord Adams in New York, said investors have been too quick to assume that the financial markets are on the mend.

"We're way ahead of ourselves in this market. We're in the eye of the storm now, and we've been in it since March," he said. "Now we're in the back end of the storm."