Stocks fell on Thursday as analyst downgrades in the telecom sector and a move out of technology stocks outweighed hopes that bank stress tests results would show most banks are healthier than thought.

Telecom companies Verizon and AT&T were among the top drags on the blue-chip Dow Jones industrials index after JP Morgan downgraded both companies, citing long-term challenges with wireline and wireless segments.

Tech stocks fell despite stronger-than-expected results from tech bellwether Cisco Systems after the close on Wednesday. Cisco Chief Executive John Chambers said his customers were seeing more stability, adding to hopes that business conditions would soon recover.

Cisco fell 2.8 percent to $19.07 and was among the top drags on the Nasdaq, along with large-cap techs Apple and Qualcomm , each down nearly 3 percent.

The techs are under a little bit of pressure, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

There is a lot of rotation going on and what's really driving the market -- and has been in fits and starts -- has been the financials, and I think they are very much back in vogue.

The Dow Jones industrial average <.DJI> dropped 41.26 points, or 0.48 percent, to 8,471.02. The Standard & Poor's 500 Index <.SPX> shed 2.42 points, or 0.26 percent, to 917.11. The Nasdaq Composite Index <.IXIC> fell 26.08 points, or 1.48 percent, to 1,733.02.

The S&P Telecom Services index <.GSPL> slid 3 percent while the PHLX Semiconductor index <.SOXX> dropped 5.2 percent.

The results of government stress tests on the ability of the 19 largest banks to weather a deep recession will be released at 5 p.m. and are expected to show about half of the banks need more capital.

Leaked test results on Wednesday gave investors some clarity over how well the industry will cope with perhaps the most severe recession since World War II, pushing the S&P 500 index to its best close since January 6.

Financial stocks were among the bright spots on Thursday, as the KBW Bank index <.BKX> rose 1.2 percent.

Bank of America Corp , upgraded by two analysts, rose more than 15 percent to $14.63 and was the top boost to the Dow.

Several retailers reported better-than-expected monthly sales figures, offering fresh evidence that consumers' willingness to spend is increasing.

Wal-Mart Stores Inc , the world's largest retailer reported April sales that topped analysts' forecasts. The shares climbed 1.2 percent to $50.08.

Despite the encouraging monthly sales results, the S&P Retail index <.RLX> shed 1.1 percent.

Government data showed the number of workers filing new claims for jobless aid unexpectedly fell last week to its lowest reading since late January, while U.S. productivity grew at a slightly higher-than-expected rate as firms cut back sharply on employment to protect profits.

General Motors Corp shares slid 3 percent to $1.61 after the beleaguered automaker reported first-quarter results and said it still wants to avoid bankruptcy.

Since hitting a 12-year closing low in March, the S&P has surged 35 percent, driven by optimism about the financial system's condition and hopes the recession may be waning.

(Reporting by Chuck Mikolajczak; editing by Padraic Cassidy)

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