Wall Street falls more than 1 percent; small caps sell off

NEW YORK (Reuters) - U.S. stocks dropped more than 1 percent on Thursday, fueled by a selloff in small-cap stocks and disappointing results from Wal-Mart.

The Russell 2000 index of small cap stocks <.TOY> tumbled 1.7 percent, putting the index into correction territory. It is down more than 10 percent from its record close of 1,208.65 in early March.

The Russell 2000's decline is "either a leading market indicator or it could be a one-off where it could be a short-term correction, and that's yet to be determined. But as of now it means the sellers are slowly gaining more control," said Adam Sarhan, chief executive of Sarhan Capital in New York.

The S&P 500 is trading below technical support, its 50-day moving average, near 1,868. A close below that level could indicate further weakness.

Wal-Mart Stores Inc shares fell 2.3 percent to $76.90, weighing on both the S&P 500 and Dow, after the world's largest retailer forecast second-quarter profit below analysts' estimates. The company also reported its smallest growth in quarterly sales in nearly five years.

Momentum stocks were again among big decliners. The Nasdaq Biotechnology Index <.NBI> fell 2 percent and the Global X Social Media Index lost 1.2 percent, while shares of Facebook was down 1 percent at $58.06.

The Dow Jones industrial average <.DJI> fell 176.34 points or 1.06 percent, to 16,437.63, the S&P 500 <.SPX> lost 22.31 points or 1.18 percent, to 1,866.22 and the Nasdaq Composite <.IXIC> dropped 50.97 points or 1.24 percent, to 4,049.65.

Kohl's Corp shares lost 2.4 percent to $52.71 after the specialty departmental retailer reported weaker-than-expected first-quarter earnings. The S&P retail sector index <.SPXRT> was off 1.6 percent.

Economic data was mixed. New applications for U.S. unemployment benefits hit a seven-year low last week while consumer prices recorded their largest increase in 10 months in April, pointing to a firming economy.

But U.S. industrial output fell at its fastest rate in more than 1-1/2 years in April as factory production slumped, tempering hopes for a big jump in economic growth after a winter slowdown.

Among the day's gainers, Cisco Systems Inc jumped 7.1 percent to $24.43, a day after the network equipment maker posted a shallower-than-expected 5.5 percent drop in quarterly revenue.

(Additional reporting by Angela Moon; Editing by Chizu Nomiyama and Nick Zieminski)

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