Dow, S&P fall despite global central bank action

NEW YORK (Reuters) - The Dow and the S&P 500 fell on Thursday, retreating from the biggest three-day rally of the year as investors geared up for a jobs report that is likely to show Europe's crisis is weighing heavily on the U.S. economy.

The market derived no lasting benefit from reports showing rising private sector employment and falling claims for jobless benefits since investors traditionally give more weight to the monthly non-farm payrolls report due on Friday.

Financials were a weight on Wall Street, led by JPMorgan Chase . The Dow component was down 3.9 percent and exerted the biggest drag on the 30-stock average.

News that the U.S. service sector slowed to a 2-1/2-year low in June was more in line with investor fears that the euro zone debt crisis was sapping global growth, encouraging traders to take profits from the strong run that began last Friday and extended on Monday and Tuesday.

Economists expect the payrolls report to show increased hiring in June, but not by enough to dispel concerns that the recovery is losing steam as Europe's debt debacle saps the strength of the global economy.

"The genesis of the economic decline we're seeing is Europe. It is spilling everywhere," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"The market's main focus continues unchanged and that is going to be the European debt crisis. I still think that is going to be the big news story that will have the greatest impact on stock movements."

The Dow Jones industrial average dropped 21.95 points, or 0.17 percent, to 12,921.87. The Standard & Poor's 500 Index dropped 3.77 points, or 0.27 percent, to 1,370.25. The Nasdaq Composite Index gained 5.07 points, or 0.17 percent, to 2,981.15.

The S&P Financial index fell 1.3 percent and the KBW Banks index was 1.4 percent lower.

Financials have often taken the brunt of selling during the European crisis, though they also enjoyed a good run during the recent rally.

The market was unimpressed by China, Europe and Britain all loosening monetary policy in the space of less than an hour.

If anything, it signaled a growing level of alarm about the world economy and none of the ECB's moves were seen as dramatic enough to turn the tide on its crisis.

Meanwhile, Spain's difficulties increased, with its 10-year borrowing costs rising despite the euro zone's latest plan to help the region's troubled economies.

Costco Wholesale Corp , Macy's Inc , Kohl's Corp and Target Corp were among the chains that reported disappointing June sales at stores open at least a year.

Costco shares were down 0.4 percent at $94.01 and Target shares fell 0.5 percent to $57.51.

(Editing by Dave Zimmerman)