Stocks dropped on Friday after government data showed a larger-than-expected drop in July payrolls, lending more weight to concerns of a slow economic recovery.

Stocks had been rising for the past month, largely on the back of corporate earnings, and the S&P remains up nearly 9 percent from its low for the year reached on July 2.

But Friday's declines once again pushed the S&P 500 into negative territory for the year and the benchmark index fell below its 200-day moving average, now around 1,115, a level which had previously provided support.

Investors get optimistic that we are turning the corner, things are going to improve, then we get these numbers again, said Terry Morris, senior equity manager for National Penn Investors Trust Co in Reading, Pennsylvania.

We want to think that it's improving, but we keep getting nailed.

The U.S. economy lost 131,000 jobs in July -- more than twice the decline of 65,000 that economists forecast in a Reuters poll. And the closely watched private employment number rose less than expected.

Consumer stocks ranked among the biggest losers as the monthly jobs report heightened worries about consumer spending, which accounts for about two-thirds of U.S. economic activity. Retailer Office Depot , which sells school and office supplies, slid 7.8 percent to $4.50, while the S&P consumer discretionary index <.GSPD> fell 1.5 percent.

The Dow Jones industrial average <.DJI> fell 134.11 points, or 1.26 percent, to 10,540.87. The Standard & Poor's 500 Index <.SPX> lost 15.51 points, or 1.38 percent, to 1,110.30. The Nasdaq Composite Index <.IXIC> shed 28.71 points, or 1.25 percent, to 2,264.35.

The downward turn in the S&P 500's short-term momentum is a bit of a negative, according to Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston, but he said he won't be concerned if the index pulls back to 1,080 or slightly below.

But other chartists point out that a close below the 200-day moving average could mean the S&P's daily chart generated a double top, which would be seen as a bearish signal.

In mid-June, the benchmark S&P 500 closed above its 200-day moving average for five straight days before a two-week slide that took it down to its 2010 low in early July.

Dow component Kraft Foods Inc was among the few bright spots, rising 2.3 percent to $30.35 after the company, whose products include Kraft cheese and Maxwell House coffee, reported a higher-than-expected quarterly profit. Kraft also raised its target for cost savings from its acquisition of Cadbury, the British company known for its chocolates.

Shares of grain companies like Archer Daniels Midland Co and Bunge Ltd edged lower after rallying more than 5 percent on Thursday. Investors took profits a day after wheat prices soared on Russia's suspension of grain shipments because of its worst drought in a century.

Bunge dipped 0.1 percent to $54.41, while Archer Daniels Midland slipped 0.7 percent to $30.04.

(Additional reporting by Rodrigo Campos)

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