US STOCKS-Wall St drops 1 percent as fears of Fed policy change mount

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks dropped 1 percent on Wednesday, extending a recent selloff, as investors grappled with concerns that the Federal Reserve's stimulus may be nearing an end while the economy is still sluggish.

Selling was broad-based, with all but two of the S&P sectors down more than 1 percent. The materials index fell 2.1 percent as the day's worst performer. Decliners outpaced advancers on the New York Stock Exchange by more than 4 to 1.

Analysts said recent selling could suggest the market may be moving away from its seven-month rally. The benchmark S&P 500 has now fallen 3.6 percent since its all-time closing high on May 21, a day before Fed Chairman Ben Bernanke said the U.S. central bank may decide to taper its stimulus in the next few policy meetings if data shows the economy is gaining traction.

"I think we're to the point where there hasn't been a whole lot of good news, and the level of concern regarding the Fed's action is kind of overwhelming and has set up a modest tone consistent with a pullback," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

One strong signal of a change in trend has been the rotation out of high-yielding dividend stocks, which has coincided with a rise in U.S. Treasury bond yields, Dickson said, since those stocks had been among the biggest gainers in this year's rally.

The Dow Jones industrial average was down 216.95 points, or 1.43 percent, at 14,960.59. The Standard & Poor's 500 Index was down 22.48 points, or 1.38 percent, at 1,608.90. The Nasdaq Composite Index was down 43.78 points, or 1.27 percent, at 3,401.48.

The S&P 500 came close to breaking below its 50-day moving average at 1,604, a possible signal of more bearish sentiment. The Dow and Nasdaq registered their biggest percentage drops in about six weeks.

Economic data has been mixed, which has left investors caught between fears the Fed will reduce its stimulus and worry that the economy is still weak.

A private sector report showed companies had picked up the hiring pace in May, though job growth remained sluggish. The Fed's "Beige Book" report did little to change the day's trend.

The report said the economy expanded at a "modest to moderate" pace since mid-April while hiring remained relatively subdued.

The government's monthly employment report, a key economic indicator, is scheduled for Friday.

Adding to the bearish tone, Japanese shares fell to a two-month low after a speech by Prime Minister Shinzo Abe on his growth strategy to revive the world's third-largest economy disappointed investors.

Apple shares fell 0.9 percent to $445.11 after Samsung Electronics scored a victory in the rivals' long-running dispute over mobile device patents.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry)