The Dow suffered its worst drop of 2010 on Wednesday as U.S. stocks succumbed to fears that China's curbs on bank lending might jeopardize the global economic recovery, while IBM's outlook sparked caution about the technology sector.

Chinese authorities have ordered some major banks to curb their lending over the rest of this month after an early burst of credit, banking industry sources said.

Signals that China, the world's third-largest economy, may restrain its economic expansion hurt shares of natural resource companies, including Alcoa Inc , off 2.5 percent at $15.23, and big manufacturers, with Caterpillar Inc , down 1.9 percent at $59.76.

The S&P materials sector index <.GSPM> fell 1.5 percent.

This is really a direct result of concerns around the tightening of credit in China, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Although IBM posted a stronger-than-expected quarterly profit late on Tuesday, investors had misgivings about its guarded 2010 outlook, sending the stock down nearly 3 percent.

The Dow Jones industrial average <.DJI> tumbled 122.28 points, or 1.14 percent, to end at 10,603.15. The Standard & Poor's 500 Index <.SPX> fell 12.19 points, or 1.06 percent, to finish at 1,138.04. The Nasdaq Composite Index <.IXIC> dropped 29.15 points, or 1.26 percent, to close at 2,291.25.

The Dow suffered its largest daily percentage decline since late December, while the Nasdaq took its largest daily percentage loss in a week. It was the worst drop for the S&P 500 since Friday.

On Tuesday, the Dow and the S&P 500 ended at 15-month highs on bets the Democrats would lose a Senate seat. The S&P 500 is up 68.2 percent since bottoming out in early March 2009.

Earlier on Wednesday, the major indexes had dropped about 2 percent or more, but recovered some ground in the last hour of the session, thanks to some buying of bank stocks.

LATE JUMP FOR eBAY, STARBUCKS

The latest earnings season picked up pace after the bell, when e-commerce company eBay Inc and coffee chain Starbucks Corp posted stronger-than-expected quarterly earnings.

Shares of eBay rose 4.6 percent to $23.25 in extended trade, after ending the regular session at $22.23 on Nasdaq. Starbucks shares jumped 3 percent to $24 in after-hours trading, after ending on Nasdaq at $23.29.

Still, in the regular session, shares of International Business Machines Corp , a major technology services company, ended down 2.9 percent to $130.25 as investors perceived that its 2010 outlook is pointing to a potential slowdown in profit growth.

IBM was the Dow's biggest drag, followed by energy company Chevron Corp , down 1.9 percent at $78.15. Diversified manufacturer United Technologies Corp , another Dow component, was down 1.2 percent at $71.43.

The S&P energy index <.GSPE> dropped 1.7 percent. A run-up in the U.S. dollar weighed on dollar-denominated commodity prices. U.S. February crude fell 1.8 percent, or $1.40, to settle at $77.62 a barrel.

The U.S. dollar index <.DXY> was up 1.1 percent against major currencies, helped by worries about Greece's ability to refinance its deficit.

On the Nasdaq, Apple Inc was the heaviest weight, down 1.5 percent at $211.725. Other tech bellwethers off 1 percent or more were Google , Microsoft and Cisco .

Investors count on emerging economies like China to underpin a nascent global recovery, so any restrictive policy there could be a setback for those that bet on a sustainable rebound and recently propelled the S&P 500 to 15-month highs.

Healthcare stocks, which led an advance on Tuesday on signs that a healthcare overhaul could face new hurdles in Congress, declined on Wednesday as some investors booked profits. The Morgan Stanley healthcare payor index <.HMO> lost 2.1 percent and an index of pharmaceutical companies <.DRG> dipped 0.3 percent.

On a busy earnings day for U.S. banks, Wells Fargo & Co and U.S. Bancorp reported better-than-forecast quarterly earnings, helped by recent acquisitions, while a larger rival, Bank of America, got a boost from Merrill Lynch.

Bank of America , the top U.S. bank by assets, reported a wider-than-expected loss, but said its credit problems were beginning to stabilize.

U.S. Bancorp shares rose 2.1 percent to $25.01 and Bank of America gained 1 percent to $16.49. The KBW bank index <.BKX> rose 1.4 percent.

On the New York Stock Exchange, about 1.05 billion shares changed hands, below last year's estimated daily average of 2.18 billion. On the Nasdaq, about 2.39 billion shares traded, above last year's daily average of 1.63 billion.

Declining stocks outnumbered advancing on both the NYSE and Nasdaq by a ratio of about 3 to 1.

(Reporting by Ellis Mnyandu; Additional reporting by Rodrigo Campos; Editing by Jan Paschal)

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