By Rodrigo Campos
NEW YORK (Reuters) - U.S. stocks fell on Thursday after the health of Portugal's top listed bank was questioned, bringing back to markets the specter of a weakened Europe.
With U.S. stocks near record highs, the slide in Europe translated into broad selling on Wall Street. Many market participants have called for a pullback, with the steady S&P 500 yet to see a daily decline of 1 percent or more 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. Shares of the bank fell 17.2 percent. The S&P 500 financial sector fell 1.3 percent.
Portugal's benchmark stock index fell 3.8 percent and Italy's FTSE MIB fell 2 percent. An index of European bank shares was down 1.9 percent.
The Dow Jones industrial average fell 117.1 points or 0.69 percent, to 16,868.51, the S&P 500 lost 12.79 points or 0.65 percent, to 1,960.04 and the Nasdaq Composite dropped 41.37 points or 0.94 percent, to 4,377.67.
"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."
Investors in Lumber Liquidators certainly thought they were paying too much. Shares fell 21.5 percent to $55.31 after the hardwood flooring retailer cut its earnings outlook.
Sandwich chain Potbelly Corp estimated second-quarter revenue and profit below analysts expectations and its shares slid 24.2 percent to $11.10.
Declining issues outnumbered advancing ones on the NYSE by 2,257 to 604, for a 3.74-to-1 ratio on the downside. On the Nasdaq, 2,167 issues fell and 340 rose for a 6.37-to-1 ratio favoring decliners.
The CBOE Volatility Index hit its highest since May 20 before paring gains. The VIX last week hit 10.28, its lowest level since early 2007, and was recently up 8.5 percent at 12.64.
Earlier in the session, futures held on to steep losses after data showed filings for new U.S. unemployment benefits 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 and Nick Zieminski)