(Corrects paragraph 2 to delete reference to worst day since May 6)

NEW YORK - Investors fled the U.S. stock market on Tuesday and the S&P 500 tumbled to its lowest level in eight months in a sell-off triggered by a wave of increasing alarm over the global economic outlook.

All but one stock in the S&P 500 ended lower as escalating doubts about the stability of Europe's banks roiled markets once again.

The S&P 500 had tumbled below its 2010 intraday low of 1,040.78 during the session, which analysts said could ignite further declines. The index closed at its lowest level since October 30, breaking its closing low for the year at 1,050.47 -- another bearish signal for markets.

Everybody is talking about 1,040, that it is the do-all, end-all, blow it up, end of the world, blood on the streets level. The market crashes, the S&P goes to 900, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

Economically sensitive sectors such as materials, industrials and financials were among the hardest hit.

Boeing Co slid 6.3 percent to $63.04 and Caterpillar Inc shed 5.5 percent to $60.85. Diversified manufacturer 3M Co , which raised its second-quarter sales outlook last night, was not immune to the selling pressure, dipping 0.6 percent to $78.49.

The Dow Jones industrial average <.DJI> lost 268.22 points, or 2.65 percent, to 9,870.30. The Standard & Poor's 500 Index <.SPX> fell 33.33 points, or 3.10 percent, to 1,041.24. The Nasdaq Composite Index <.IXIC> dropped 85.47 points, or 3.85 percent, to 2,135.18.

Fears about the strength of the banking system surfaced again, with investors worried about a potential liquidity shortfall of more than 100 billion euros in the financial system as European banks repay 442 billion euros ($545.5 billion) in emergency loans on Thursday.

The KBW Bank index <.BKX> fell 4.4 percent and broke its 200-day moving average today at 48.00, which it had made a stand at last Thursday and Friday.

The break of the 200-day moving average fueled more selling. Technically, this is another sign of weakness in the financials, said Elliot Spar, option market strategist at Stifel Nicolaus in Shrewsbury, New Jersey.

The CBOE volatility index <.VIX>, known as Wall Street's fear gauge, surged 22 percent to a session high of 35.39, its highest level since early June, in a sign more volatility could be in the offing.

Earlier in the day, the Conference Board corrected its leading economic index for China to an April gain of 0.3 percent from a previously reported rise of 1.7 percent, a sharp revision that undermined confidence in China's ability to sustain strong growth.

The correction prompted investors to turn against riskier assets, adding to a global sell-off. The Shanghai Composite Index fell 4.3 percent to end at a 14-month low.

U.S. consumer confidence dropped sharply in June, after rising for three months, on worries about the labor market, according to a report from the Conference Board. The news heightened fears of an economic slowdown after a recent spate of weak data from the housing and job markets.

The day started with overseas -- China -- that was bad, said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. Then it got banged out with the consumer confidence and it all just kind of went from there.

After the closing bell, General Mills Inc dropped 4.6 percent to $35.20 after the maker of Cheerios cereal and Haagen-Dazs ice cream reported a lower quarterly profit.

About 11.38 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above last year's estimated daily average of 9.65 billion.

Declining stocks outnumbered advancing ones on the New York Stock Exchange by 2,831 to 259, while on the Nasdaq, there were 2,393 declining stocks and only 279 advancers.

(Reporting by Chuck Mikolajczak; Additional reporting by Doris Frankel; Editing by Jan Paschal)

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