Wall Street drops more than 1 percent as growth fears resurface

By Tanya Agrawal

(Reuters) - Wall Street was sharply lower, with the three major indexes falling more than 1 percent in late morning trading on Tuesday, after weak economic data out of China and Europe rekindled fears of a slowing global economy.

Activity at China's factories shrank for the 14th straight month in April as demand stagnated, a private survey showed. Britain's manufacturing output also unexpectedly shrank to hit its lowest level in three years last month.

Adding to the downward pressure, oil prices dropped about 2 percent as rising output from the Middle East renewed concerns about global oversupply. [O/R]

Exxon  shares were down 1.4 percent, while Schlumberger  fell 3.3 percent, making them the biggest drags on the S&P energy sector.

"We are reacting to the negative news overnight from China and Europe, and investors are waiting for the jobs data," said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.

"Investors are waiting for better economic data as a justification for the current prices and till we get the jobs data, we might see some down days."

The unemployment report is scheduled to be released on Friday.

Last week, data showed tepid U.S. first-quarter gross domestic product growth and a softening in the Fed's preferred measure of inflation to a rate of 1.6 percent in the 12 months through March from 1.7 percent in February.

At 11:05 a.m. ET (1505 GMT) the Dow Jones industrial average  was down 185.08 points, or 1.03 percent, at 17,706.08, the S&P 500  was down 23.04 points, or 1.11 percent, at 2,058.39 and the Nasdaq Composite was down 59.43 points, or 1.23 percent, at 4,758.16.

Nine of the 10 major S&P sectors were lower, with the energy index's  2.3 percent fall leading the decliners. The financial index  was also down 2.1 percent.

JPMorgan  and Bank of America  fell about 3.5 percent, dragging down the S&P 500. Goldman Sachs's  2.5 percent fall weighed the most on the Dow.

The S&P 500 has jumped 14 percent since mid-February, helped by recovering oil prices and an accommodative Federal Reserve. However, the index faltered last week due to lackluster earnings reports and mixed economic data.

The Fed, which held monetary policy steady last week, is focusing on data, while keeping the door open for a rate hike in June.

The United States could see two more interest rate hikes this year but uncertainties abound including the impact on the economy should Britain vote to leave the European Union, Atlanta Fed President Dennis Lockhart said on Tuesday.

Still, traders are pricing in only one rate hike at the end of the year.

Pfizer  was up 3.5 percent at $33.96 after the company reported a rise in quarterly revenue.

American International Group fell 2.3 percent to $55.22 after reporting a lower-than-expected profit for the third straight quarter.

Declining issues outnumbered advancing ones on the NYSE by 2,428 to 452. On the Nasdaq, 2,069 issues fell and 554 advanced.

The S&P 500 index showed seven new 52-week highs and three new lows, while the Nasdaq recorded 15 new highs and 32 new lows.