Stocks dropped on Friday as worries about the Italian banking sector added to anxiety emanating from Europe about passage of a Greek austerity plan, and the S&P 500 once again tested a key technical level.

Italian banks UniCredit SpA and Intesa Sanpaolo fell sharply on concerns about their capital positions alongside uncertainty about the euro-zone crisis. Trading in the banks' shares was briefly suspended.

Greece's government faced an electorate vehemently opposed to austerity measures that must be passed in parliament next week to avert default, but progress is being made in persuading banks to take part in a second bailout.

Essentially they all know they have to help Greece, and that is the biggest thing, said Keith Springer, president of Springer Financial Advisors in Sacramento, California.

But Greece isn't helping themselves and that is all anybody wants. All they are looking for is for Greece to help themselves a little bit.

The S&P remained within striking distance of its 200-day moving average -- a line the bulls have been able to hold since last September. The level was at 1,263.49.

The Dow Jones industrial average <.DJI> dropped 77.77 points, or 0.65 percent, to 11,972.23. The Standard & Poor's 500 Index <.SPX> lost 10.19 points, or 0.79 percent, to 1,273.31. The Nasdaq Composite Index <.IXIC> declined 24.01 points, or 0.89 percent, to 2,662.74.

Both the KBW Banks Index <.BKX> lost 1 percent and the S&P Financial Sector Index <.GSPF> shed 0.8 percent.

On Thursday, the market welcomed Greece's agreement to a five-year austerity plan.

The euro declined against the dollar for a third straight session on worries Greece's parliament might not pass austerity measures needed for the country to secure more bailout funds.

In the latest economic data, new orders for long-lasting U.S. manufactured products, known as durable goods, increased 1.9 percent in May after dropping 2.7 percent in April as bookings for transportation equipment rebounded strongly.

Oracle Corp , off 3.8 percent at $31.22, was the biggest drag on both the S&P 500 and Nasdaq 100 indexes <.NDX> a day after the world's No. 3 software maker posted disappointing results, especially in hardware sales, sparking concerns about a bigger slowdown in technology spending.

Micron Technology Inc tumbled 12.5 percent to $7.36

after the memory chipmaker recorded results below expectations late Thursday.

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)