U.S. stocks fell on Tuesday as uncertainty over financial companies' health prompted a sell-off, while concerns mounted about the validity of a rally that has driven stocks up nearly 50 percent from March.

Benchmark indexes bounced in morning trading on encouraging data, but sharply reversed course before midday due to fears of a revival of trouble in the financial sector.

The KBW bank index <.BKX> dropped 4.3 percent. Among the top drags were shares of JPMorgan Chase & Co , down 2.7 percent at $42.31, and Citigroup , down 6.6 percent at $4.67.

Troubled insurer American International Group tumbled 16.9 percent to $37.68.

The problems in financials are nowhere near over. They have been masked for awhile, sort of hidden away by government stimulus, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

People are coming to a realization as they grow more cautious that additional government help is not available.

The Dow Jones industrial average <.DJI> slid 165.73 points, or 1.75 percent, to 9,330.55. The Standard & Poor's 500 Index <.SPX> fell 19.47 points, or 1.91 percent, to 1,001.15. The Nasdaq Composite Index <.IXIC> lost 34.25

points, or 1.70 percent, to 1,974.81.

Positive manufacturing and housing data inspired only a brief rally, which investors used as an opportunity to sell.

The Institute for Supply Management showed U.S. manufacturing expanded in August for the first time since January 2008.

The National Association of Realtors said pending home sales rose in July to the highest level since June 2007.

Along with the good news, there were also some notes of caution, said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

The home tax credit initiative is coming to an end in November and I think the Realtors' association understands this is pulling forward sales and that demand (for homes) is going to dry up.

An $8,000 tax credit available for first-time home buyers expires before December 1.

On the Nasdaq, Apple Inc fell 1.3 percent to $166.02, and ebay Inc slipped 2.1 percent to $21.68.

The CBOE Volatility Index <.VIX> or VIX, Wall Street's favorite barometer of investor fear, shot up 9.7 percent to 28.54 as investors use options to take out protection against further declines in stocks.

(Editing by Jan Paschal).

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