Wall St. drops on Portugal bank worry; losses pared

NEW YORK (Reuters) - U.S. stocks pulled well off session lows but were still falling on Thursday as concerns about the financial health of Portugal's top listed bank gave investors a reason to cash in recent gains.

With the Dow and the S&P 500 near record highs, the slide in Europe triggered by financial shares quickly translated into broad selling on Wall Street. The S&P 500 briefly lost 1 percent, a daily drop the benchmark has not seen since April 10.

Espirito Santo Financial Group , the largest shareholder in Portugal's Banco Espirito Santo , suspended trading in its shares and bonds, citing "material difficulties" at parent company ESI. The bank's shares tumbled 17.2 percent. The S&P 500 financial sector index <.SPSY> fell 0.8 percent.

Portugal's benchmark stock index <.PSI20> fell 4.2 percent and Italy's FTSE MIB <.FTMIB> slid 1.9 percent. An index of European bank shares <.SX7P> dropped 1.7 percent after earlier falling as much as 3.1 percent.

The Dow Jones industrial average <.DJI> fell 71.67 points or 0.42 percent, to 16,913.94. The S&P 500 <.SPX> lost 6.86 points or 0.35 percent, to 1,965.97. The Nasdaq Composite <.IXIC> dropped 15.84 points or 0.36 percent, to 4,403.20.

"In a world of global news, you can always find something that is not doing well, whether it is political events in Iraq or banking in Portugal," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.

"The real test will be the earnings and that will either give confidence to people to come back in or make them realize the prices they have been paying are just too high."

Some investors in Lumber Liquidators thought they were paying too much. Shares plunged 21.7 percent to $55.17 after the hardwood flooring retailer cut its earnings outlook.

Sandwich chain Potbelly Corp estimated second-quarter revenue and profit below analysts' expectations and its stock plummeted 22.9 percent to $11.29.

Shares of Crumbs Bake Shop Inc rose more than tenfold after CNBC reported that a group including the Fischer family and Marcus Lemonis, an executive who stars on the CNBC show "The Profit," is ready to provide financing for the struggling chain of cupcake shops as a prelude to an acquisition. Earlier this week, Lemonis tweeted links to news stories on Crumbs' demise followed by the words "not so fast."

Crumbs shares shot up 1,200 percent to 40 cents.

Declining issues outnumbered advancing ones on the New York Stock Exchange by 2,103 to 860, for a 2.45-to-1 ratio on the downside. On the Nasdaq, 1,992 issues fell and 628 rose for a 3.17-to-1 ratio favoring decliners.

The S&P utilities index <.SPLRCU> and the S&P telecom index <.SPLRCL>, defensive plays favored for their relatively high dividends, rose as the yield on the 10-year U.S. Treasury note briefly dropped to its lowest since June 2.

The CBOE Volatility Index <.VIX> hit its highest since May 20 before paring gains. A week ago, the VIX hit 10.28, its lowest level since early 2007. At midday on Thursday, the VIX was up 5.9 percent at 12.34.

Earlier in the session, futures held on to steep losses after data showed filings for new U.S. unemployment benefit claims fell last week to one of the lowest levels since before the 2007-09 recession.

In other data, U.S. wholesale inventories rose in May, reinforcing the view that economic growth should surge in the second quarter following a weak start to the year.

(Reporting by Rodrigo Campos; Additional reporting by Chuck Mikolajczak; Editing by Bernadette Baum, Nick Zieminski and Jan Paschal)

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