Wall Street stocks were set to open lower on Friday amid fears of bigger-than-expected writedowns and loan-losses at financial companies and as Bank of America (NYSE:BAC) agreed to absorb Countrywide Financial (NYSE:CFC), the troubled mortgage lender.

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Less than an hour before the opening bell, S&P 500 futures down 7.5 points at 1,413.50 Nasdaq futures down 11.8 points at 1,949.0 while futures for the Dow Jones Industrial Average fell 59 points to 12,785.

Financial companies were again set to dominate the trading day after Bank of America on Friday confirmed it has agreed to buy Countrywide Financial for $4bn in stock.

The transaction valued Countrywide at $7.16 per share, a 7.6 percent discount to the Thursday closing price.

Although the deal is set to rescue the troubled mortgage lender from possible collapse shares in both companies fell in the pre-market on Friday amid lingering concerns about the risks involved in such a deal.

Bank of America has managed to avoid the severe credit-related losses suffered by some of its competitors but will now absorb a company considered by many to be at the epicentre of the subprime mortgage crisis.

Countrywide's shares plunged 12 per cent to $6.80 in the pre-market, after closing more than 50 per cent higher on Thursday amid reports of an impending deal. Bank of America rose 75 cents to $40.05 to $38.25 early on Friday.

In a further sign of potential consolidation in the sector CNBC reported that JPMorgan Chase had held very preliminary takeover talks with Washington Mutual (NYSE:WM). WaMu's shares rose 5.9 per cent in pre-market trade.

Although the sector rallied strongly on Thursday as some traders tried to buy into weakness, a report that Merrill Lynch may take a larger-than-expected writedown in the fourth quarter emphasised the acute risks in calling a bottom in financials.

Merrill's shares fell 2.5 per cent in the pre-market after the New York Times said Merrill's losses would increase to $15bn because of soured mortgage investments. Analysts had previously forecast around $12bn in writedowns at Merrill.

Earnings in the financial sector are expected to plunge 66 per cent in the fourth-quarter as loan-losses mount and banks are forced to write down the value of complex debt securities.

American Express (NYSE:AXP)' shares fell 7.8 per cent to $45.12 in the pre-market after the card issuer said it would take a $440m charge for the fourth quarter as more customers have missed payments. It also gave a cautious outlook for 2008.

Friedman Billings Ramsey cut its rating on the stock from "market perform" to "underperform".

AmEx's warning came soon after Capital One Financial, another credit card company, cut its full-year profit guidance by more than 20 per cent because of rising loan delinquencies.

Economists have long feared that mortgage-related losses would spread into the broader economy as consumers unable to make mortgage payments start to default on credit card and auto loans.

Wall Street is hoping that aggressive action from the Federal Reserve will help prevent the US economy from tipping into recession. Stocks rallied yesterday after Ben Bernanke opened the door to further interest rate cuts.

Although the domestic economy is seen as weakening, some analysts argue US multinationals will suffer less from a downturn because a large proportion of their revenues are overseas. The weaker dollar has provided a boon for exporters.

Although exports set another record, export growth slowed in December and the US trade gap widened to its highest level since September 2006, hurt by record oil prices. The trade deficit jumped 9.3 per cent to $63.1bn, much larger than $60bn expected by economists, the US Commerce Department said on Friday.

After the trade data the dollar briefly pared early gains and US Treasuries weakened slightly.

European stocks fell ahead of the open on Wall Street. The FTSE Eurofirst 300 index was down 0.4 per cent while the FTSE 100 slipped 0.5 per cent. Asian equity markets closed mainly lower, led by a 1.9 per cent fall on the Nikkei.

Bond yields waned and prices rose amid a more defensive mood on Wall Street. The yield on the two-year Treasury note fell 4 basis points to 2.65 per cent while the 10-year Treasury note yield gave up 2 bp to 3.87 per cent.

After Mr Bernanke's dovish comments on Thursday interest rate futures priced in a 98 per cent likelihood of a 50bp cut at the end of this month, with at least two further 25bp cuts seen likely.

The dollar rose 0.1 per cent against the euro to $1.4785 and added 0.2 per cent against the pound to $1.9580.

Gold was trading just shy of the $900 mark at $892.6. Oil prices continued to decline a barrel of crude oil trading 54 cents weaker at $93.17.