That was seen as a step toward Greece's securing a (euro) 130 billion international bailout that it must have to avoid defaulting on its debt next month and sending a shock through the world financial system.
On Friday, European finance ministers insisted Greece agree to deeper cuts in wages and spending. More than 15,000 people swarmed the streets of Athens, some hurling paving stones at police. Several cabinet ministers have resigned over the cuts.
The violence broke after unions launched a two-day general strike that disrupted transport and other public services and left state hospitals running on emergency staff.
"The economy in Greece is deteriorating faster than anticipated, and the austerity measures aren't particularly popular," said Mark Luschini, chief investment analyst at Janney Montgomery Scott. "There could be a disorderly default."
Papademos promised to "do everything necessary" to ensure parliament passes the new austerity measures that would slap Greeks with a minimum wage cut during a fifth year of recession. He also promised to replace any other Cabinet members who did not fully back his efforts.
Greece has promised to approve the new austerity measures as emergency legislation by late Sunday, despite deep public resentment. Papademos' coalition is backed by 252 lawmakers in the 300-seat parliament. Eurozone finance ministers said more austerity needs to be agreed to and set a deadline for the middle of next week.
Greece's problems have roiled stock markets globally. The decline in U.S. stocks Friday was broad, with all 10 industry categories in the S&P 500 down. Materials stocks fell the most, down 1.8 percent. Energy and financial stocks both fell more than 1 percent.
The Nasdaq composite closed down 23.35 points at 2,903.88.
Since the start of the year, stocks have been generally rising on small daily gains because of good economic news and a sense that the worst of the debt crisis in Europe might be over. The Dow has risen 4.8 percent in 2012 and seemed poised earlier this week to break 13,000 for the first time since 2008.
At its low point Friday, the Dow was down 145 points. Its largest intraday loss so far this year was 159 points, on Jan. 13, but the Dow has not closed down more than 100 points since Dec. 28.
Aluminum producer Alcoa dropped 3.3 percent, the biggest fall among the 30 stocks in the Dow.
The euro, which had risen Thursday to its highest level against the dollar in two months, fell by a penny and was trading at just under $1.32. U.S. Treasury yields fell, a sign that investors were buying bonds as a safer investment than stocks.
The price of gold fell $16, or nearly 1 percent, to settle at $1,725 an ounce. Gold usually rises when stocks fall because it's seen as a safe place to park money when markets are volatile, but that relationship has broken down recently. Many investors now worry that gold is too expensive after a 26 percent surge over the past year.
"People are speculating, and so the drop could get bigger," said Mark Matson, CEO of Matson Money, which manages more $3 billion in assets. "Gold is good for jewelry, not in your portfolio."
In other commodity news, the price of oil fell $1.17 to $98.67 a barrel.
Among stocks making big moves:
LinkedIn rose 18 percent. The online networking company announced that fourth- quarter earnings had soared and revenue doubled.
Jeans maker True Religion Apparel plunged 28 percent. The company reported earnings that were far below what analysts were expecting. Analysts slashed their ratings on the stock, citing weak sales and big markdowns.
NYSE Euronext, parent company of the New York Stock Exchange, rose 4.5 percent, best among stocks in the S&P 500. It beat Wall Street estimates for revenue and profit. CEO Duncan Niederauer said the company would focus on growth and perhaps small acquisitions after a failed attempt to merge with a German exchange company.
Telecom gear maker Alcatel-Lucent rose 12 percent after announcing it made its first annual profit in 2011 after years of losses.
First Solar, a solar panel maker, fell 10 percent. The company said a construction delay is threatening to undo the sale of a large solar project to power producer Exelon Corp.
Stocks were lower in much of Europe. The benchmark stock index in Athens fell 3.2 percent. Germany's DAX was down 1.4 percent. The CAC-40 in France was down 1.5 percent.
On the New York Stock Exchange, three stocks fell for every one that rose. Volume was light, with just 3.5 billion shares trading hands.