The Dow and S&P 500 suffered their worst one-day fall in three months on Thursday after economic reports fueled fears about the recovery's strength.

The pullback occurred a day after stocks ended the third quarter with strong gains, with the Dow and S&P each up 15 percent from the previous quarter.

Cyclical stocks, which are sensitive to the economy's cycles, were among the worst performers, including technology and bank shares.

The KWB bank index <.BKX> dropped 5 percent while an index of semiconductors <.SOXX> fell 4.8 percent. Airlines also fell sharply, with an airline index <.XAL> down 8.3 percent.

The Institute for Supply Management's index of national factory activity declined in September from August's reading, and although the latest reading still indicated growth, it was sharply below economists' forecast in a Reuters poll.

Data on jobless claims also was worse than expected.

There was disappointment from the ISM this morning. It missed expectations, said Mike O'Rourke, chief market strategist at BTIG in New York.

With the last quarter ending, a lot of people were holding stuff up for window dressing and now you're seeing profit-taking, he added. We've had a tremendous run up.

Analysts said the news added to anxiety ahead of Friday's September jobs report from the government, the month's biggest data release.

The Dow Jones industrial average <.DJI> tumbled 203.00 points, or 2.09 percent, to end at 9,509.28. The Standard & Poor's 500 Index <.SPX> slid 27.23 points, or 2.58 percent, to 1,029.85. The Nasdaq Composite Index <.IXIC> lost 64.94 points, or 3.06 percent, to 2,057.48.

JPMORGAN AND MICROSOFT SLIDE

It was the third straight day of declines for stocks and the Nasday's worst fall since June 22, just before the market suffered a modest pullback.

All 30 Dow components finished in the red, with the Dow's biggest decliners including JPMorgan Chase & Co , down 5.6 percent at $41.37, and Boeing Co , down 3.8 percent at $52.11.

Bank of America Corp shares slipped 4.2 percent to $16.21 after Chief Executive Ken Lewis said he was retiring after months of being dogged by a series of government investigations into the company's acquisition of Merrill Lynch. The company did not name a successor. The news was announced late on Wednesday. [ID:nN30236559]

Heavy equipment maker Caterpillar , down 3.7 percent at $49.45, also ranked among the Dow's biggest decliners.

Among the Nasdaq's major losers were tech bellwethers Apple Inc , down 2.4 percent at $180.8599; Qualcomm Inc , down 5.1 percent at $42.70 and Microsoft Corp , down 3.3 percent at $24.88.

Goldman Sachs removed Microsoft from its Americas Conviction Buy list, saying the company may have one more soft quarter.

In the ISM report, the manufacturing reading fell to 52.6, below economists' forecast of 54.0, and August's 52.9. The Labor Department report showed initial claims for state unemployment insurance rose more than expected.

The reports overshadowed data from the Commerce Department that showed personal spending jumped 1.3 percent in August, the largest gain sine October 2001.

Even with the recent losses, the S&P 500 is still up 52.2 percent from its 12-year closing low on March 9.

Volume was above average on the New York Stock Exchange, with 1.60 billion shares changing hands, higher than last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.69 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of 5 to 1, while on the Nasdaq, about 11 stocks fell for every two that rose.

(Additional reporting by Ellis Mnyandu)

(Editing by Jan Paschal)

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