U.S. stocks tumbled, marking

their worst slide in a month on Monday after regional manufacturing data dented optimism about the economy's health and resource shares fell alongside commodity prices.

After a series of signs the economy may be stabilizing, investors are looking for more definitive signals of its improving health. Analysts also said a pullback was unsurprising after a three-month rally.

Economists had expected to see slight improvement in the New York Fed's Empire State index, but the survey showed the factory sector shrank at a much more severe rate in June than the previous month.

The bottom line is investors were starting to factor in a V-shaped recovery to the economy, said Alan Lancz, president of Alan B. Lancz & Associates Inc, in Toledo, Ohio.

Not only do prices get ahead of themselves, but there's also a situation where if we don't get that V-shaped recovery, then you have more than just a temporary pullback. That's what might scare investors in the more immediate term.

Manufacturers' shares fell, including 3M , which was down 2.8 percent at $59.31, while Caterpillar shed 4.3 percent to $36.12.

Oil prices fell from nearly an eight-month high after Russia expressed confidence in the U.S. dollar as the world's reserve currency, increasing the greenback's safe-haven appeal. Commodity prices and the dollar have moved inversely of late. Gains in the dollar makes oil more expensive for holders of other currencies.

Chevron fell 2.2 percent to $71.08. The S&P energy index <.GSPE> slid 2.3 percent.

The Dow Jones industrial average <.DJI> fell 187.13 points, or 2.13 percent, to 8,612.13. The Standard & Poor's 500 Index <.SPX> lost 22.49 points, or 2.38 percent, to 923.72. The Nasdaq Composite Index <.IXIC> dropped 42.42 points, or 2.28 percent, to 1,816.38.

While the recent run-up in commodity prices had helped stocks extend their rally, there has also been concern that a surge in oil and other commodities could hamper any budding economic recovery. Higher energy costs are a drag on consumer spending and corporate profits.

In light volume, the indexes racked up their biggest one-day percentage loss since mid-May.

But the broad S&P 500 is still up 36.5 percent from the 12-year closing low of March 9.

A SPIKE IN VOLATILITY

The CBOE Volatility Index <.VIX>, known as Wall Street's fear gauge, closed above the 30 level for the first time since early June, suggesting more turmoil could be in store. The VIX jumped 9.5 percent to end at 30.81, its biggest percentage gain since late April.

This week marks quadruple witching, a term used to describe the quarterly expiration of June equity options, index options, single stock futures and index futures. This can bring more volatility as players adjust or exercise their derivative positions.

Sentiment also cooled after Goldman Sachs cut its rating on Wal-Mart Stores Inc to neutral from buy, saying it did not see a lot of positive catalysts to drive shares higher in the near-term as expense pressures and tougher sales comparisons persist.

Wal-Mart, a Dow component, fell 2.8 percent to $48.46, and was among the top drags on the blue-chip Dow average. The S&P's retail index <.RLX> fell 1.4 percent.

The technology sector, which has helped lead the market rally, slipped as investors took profits. Bellwethers such as Qualcomm Inc fell 3.8 percent to $44.31 and Oracle Corp slipped 3 percent to $20.22.

Trading volume was low on the New York Stock Exchange, with only about 1.15 billion shares changing hands, well below last year's estimated daily average of 1.49 billion. On Nasdaq, about 2.19 billion shares traded, below last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2,595 to 457 while on the Nasdaq, decliners beat advancers by

2,127 to 552.

(Editing by Jan Paschal)

Russia