* Portuguese, Italian markets slide, weigh on Europe
* Icahn says time to be cautious about U.S. stocks
* Dow off 0.4 pct; S&P off 0.4 pct; Nasdaq off 0.5 pct (Updates to the close)
By Angela Moon
NEW YORK, July 10 (Reuters) - U.S. stocks dropped 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 earlier, 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. Portugal's benchmark stock index fell 4.2 percent and Italy's FTSE MIB slid 1.9 percent.
The S&P 500 financial sector index fell 0.5 percent. Wells Fargo & Co, a component of the S&P financial index, fell 0.7 percent to $51.81. The bank will report earnings on Friday.
"There seems to be a lot of angst in the market short term, but given the fact we had such a run the past couple of weeks, it seems to be more psychological than real," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
Among the day's biggest decliners was Lumber Liquidators which plunged 21.5 percent to $55.25 after the hardwood flooring retailer cut its earnings outlook. The stock fell as low as $54.32, its lowest level since February 2013.
Sandwich chain Potbelly Corp estimated second-quarter revenue and profit below analysts' expectations and its stock plummeted 25.1 percent to $10.97, just above an all-time low of $10.91.
The S&P utilities index and the S&P telecom index , defensive plays favored for their relatively high dividends, rose 0.6 percent and 0.8 percent, respectively. The yield on the 10-year U.S. Treasury note briefly dropped to 2.494 percent, its lowest since June 2.
The Dow Jones industrial average fell 70.54 points or 0.42 percent, to 16,915.07. The S&P 500 slid 8.15 points or 0.41 percent, to 1,964.68. The Nasdaq Composite dropped 22.83 points or 0.52 percent, to 4,396.20.
With Thursday's decline, the S&P 500 was down 1 percent for the week and on track for its biggest weekly loss since April.
The Dow fell as much as 180.23 points shortly after the opening bell and then recovered to close about 85 points below the 17,000 milestone reached last week.
Just a week ago, the Dow closed above 17,000 for the first time, ending at a record of 17,068.26, while the S&P 500 ended at an all-time high of 1,985.44.
Billionaire activist investor Carl Icahn said on Thursday that it is time for investors to tread carefully after the run-up in U.S. stock markets.
"In my mind, it is time to be cautious about the U.S. stock markets," Icahn said in a telephone interview. "While we are having a great year, I am being very selective about the companies I purchase."
Among the day's gainers was TRW Automotive Holdings Corp , up 8.2 percent at $98.91 after Bloomberg reported that the auto parts supplier had received a preliminary takeover proposal and was in the process of evaluating it. The stock hit an all-time high of $101.75 earlier.
About 5.84 billion shares traded on U.S. exchanges, in line with the 5.79 billion average in June, according to data from BATS Global Markets.
Decliners outnumbered advancers on the New York Stock Exchange by a ratio of about 2.3 to 1. On the Nasdaq, three stocks fell for every one that rose. (Reporting by Angela Moon; Editing by Nick Zieminski and Jan Paschal)