Stocks fell early Wednesday on worries the Greece debt crisis may escalate and after a negative reading on New York State manufacturing underscored the headwinds facing the economy.

Pressuring financial stocks, Moody's said it may cut the credit ratings of French banks, citing exposure to Greek debt. The banks have $65 billion in overall net exposure, versus $40 billion for Germany and $41 billion for the United States, according to the Bank for International Settlements.

The KBW index of major U.S. bank stocks <.BKX> fell 0.7 percent, while Bank of America Corp dropped 1.8 percent to $10.61.

The New York Federal Reserve's Empire State manufacturing index, an early indicator of U.S. factory conditions, unexpectedly contracted in June, falling below zero for the first time since November.

I assume people will look at this as another reason the recovery is stalling, said Paul Radeke, vice president at KDV Wealth Management in Minneapolis.

Other data has shown that the consumer remains on track, suggesting that eventually manufacturing will catch up. However, this data suggests that process will take longer.

Retail sales declined for the first time in 11 months in May, but the fall was less than forecast, Tuesday data showed.

The Dow Jones industrial average <.DJI> lost 79.17 points, or 0.66 percent, to 11,996.94. The Standard & Poor's 500 Index <.SPX> fell 7.55 points, or 0.59 percent, to 1,280.32. The Nasdaq Composite Index <.IXIC> dropped 14.91 points, or 0.56 percent, to 2,663.81.

Many traders expect the S&P 500 to test its March low near the 1,250 level as economic data continued to support the idea a economic recovery was in question. The index closed at 1,287.87 on Tuesday, down 6 percent from its near three-year high hit May 2.

These five to seven percent declines are very, very common. We should be getting one of these every three months, said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. We've been spoiled in the last 28 months; this is not unusual at all.

De Gan said significantly weaker data could raise market expectations of an extension of the Federal Reserve's asset-buying program that spurred gains in recent months, though he cautioned expectations could be misplaced.

In other economic news, U.S. core consumer inflation rose more than expected in May, lifted by steep rises in motor vehicle and apparel prices.

(Reporting by Rodrigo Campos; additional reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

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