* Concerns over banks sink stocks; volatility spikes
* Citi off 6.6 pct, AIG down almost 17 pct
* U.S. manufacturing returns to growth in August
* Dow off 1.8 pct, S&P off 1.9 pct, Nasdaq off 1.7 pct
* For up-to-the-minute market news, click STXNEWS/US
(Updates to late afternoon; changes byline)
By Angela Moon
NEW YORK, Sept 1 (Reuters) - U.S. stocks fell on Tuesday
as uncertainty over financial companies' health prompted a
sell-off, while concerns mounted about the validity of a rally
that has driven stocks up nearly 50 percent from March.
Benchmark indexes bounced in morning trading on
encouraging data, but sharply reversed course before midday
due to fears of a revival of trouble in the financial sector.
The KBW bank index <.BKX> dropped 4.3 percent. Among the
top drags were shares of JPMorgan Chase & Co <JPM.N>, down 2.7
percent at $42.31, and Citigroup <C.N>, down 6.6 percent at
$4.67.
Troubled insurer American International Group <AIG.N>
tumbled 16.9 percent to $37.68.
"The problems in financials are nowhere near over. They
have been masked for awhile, sort of hidden away by government
stimulus," said Keith Springer, president of Capital Financial
Advisory Services in Sacramento, California.
"People are coming to a realization as they grow more
cautious that additional government help is not available."
The Dow Jones industrial average <> slid 165.73
points, or 1.75 percent, to 9,330.55. The Standard & Poor's
500 Index <.SPX> fell 19.47 points, or 1.91 percent, to
1,001.15. The Nasdaq Composite Index <> lost 34.25
points, or 1.70 percent, to 1,974.81.
Positive manufacturing and housing data inspired only a
brief rally, which investors used as an opportunity to sell.
The Institute for Supply Management showed U.S.
manufacturing expanded in August for the first time since
January 2008. For details, see []
The National Association of Realtors said pending home
sales rose in July to the highest level since June 2007.
"Along with the good news, there were also some notes of
caution," said Kim Caughey, senior equity research analyst at
Fort Pitt Capital Group in Pittsburgh.
"The home tax credit initiative is coming to an end in
November and I think the Realtors' association understands
this is pulling forward sales and that demand (for homes) is
going to dry up."
An $8,000 tax credit available for first-time home buyers
expires before Dec. 1.
On the Nasdaq, Apple Inc <APPL.O> fell 1.3 percent to
$166.02, and ebay Inc <EBAY.O> slipped 2.1 percent to $21.68.
The CBOE Volatility Index <.VIX> or VIX, Wall Street's
favorite barometer of investor fear, shot up 9.7 percent to
28.54 as investors use options to take out protection against
further declines in stocks.
(Editing by Jan Paschal)
