Wall St. drops as China sparks global economy fears

NEW YORK (Reuters) - Stocks fell on Wednesday as investors worried that China's banks might be poised to hit the brakes on lending to stem market excesses, a move that could curb the global economic recovery.

Concerns about China hurt commodity prices and hit shares in the energy and raw materials sectors, while a steep drop in U.S. durable goods orders in June fed fears of more economic weakness.

Oil futures extended losses and fell about 6 percent, or $3.88, to settle at $63.35 per barrel after U.S. government data showed a surprisingly large increase in crude inventories last week. Shares of energy companies also slid, with Chevron Corp down 2.5 percent at $66.62. The S&P energy index <.GSPE> dropped 2.8 percent.

"China has been a big driver of part of the global recovery. Their stimulus is direct and quick," said Bobby Harrington, managing director of Boston trading for UBS.

Slower growth in China's economy "could limit upside and create downward momentum" in the U.S. stock market, he said.

China's two biggest state-owned commercial banks have put a lid on their 2009 lending targets, according to domestic media reports, a move that will significantly slow overall Chinese credit growth in the second half.

The Shanghai Composite Index <.SSEC> sank 5 percent on Wednesday -- its biggest daily decline in eight months.

The Dow Jones industrial average <.DJI> fell 67.56 points, or 0.74 percent, to 9,029.16. The Standard & Poor's 500 Index <.SPX> dropped 8.88 points, or 0.91 percent, to 970.74. The Nasdaq Composite Index <.IXIC> lost 12.86 points, or 0.65 percent, to 1,962.63.

Other natural resources stocks also fell, including miners, with Freeport-McMoRan Copper & Gold Inc down 5.8 percent at $55.20. The S&P materials index <.GSPM> fell 2.4 percent.

The Commerce Department said June U.S. durable goods orders fell 2.5 percent, the largest drop since January, after rising a downwardly revised 1.3 percent in May. Durable goods are manufactured goods such as washing machines, refrigerators and cars, intended to last three years or more.

Caterpillar Inc , a maker of bulldozers and excavators, shed 3.3 percent to $41.47 and was a top drag on the Dow industrials.

Among the Nasdaq's major decliners, Yahoo Inc shares tumbled after the Internet media company announced an advertising deal with Microsoft Corp .

Yahoo's stock plunged 11.9 percent to $15.16 as some investors were disappointed by the scope of the deal. In contrast, Microsoft's stock was up 0.8 percent at $23.65.

Shares of Google Inc , a direct competitor of the new partnership, fell 1.1 percent to $434.88.

(Editing by Jan Paschal)

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