Wall Street tumbles on Ebola fears; small caps drop

3/3 © Reuters Traders work on the floor of the New York Stock Exchange 2/3

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks dropped more than 1 percent on Wednesday as the first diagnosis of Ebola in a patient in the United States spooked investors, economic data pointed to uneven growth, and the Russell 2000 index entered correction territory.

The Ebola news pressured shares of airlines and other transportation names, with the NYSE ARCA Airline index (XAL) falling 3.1 percent, the biggest percentage decline since January. The Dow Jones transportation average (DJT) dropped 2.5 percent, its biggest daily percentage drop since February.

Small-cap stocks extended recent losses and the Russell 2000 <.TOY> closed more than 10 percent below its closing high of 1,208.65 in early March, which puts the index in correction territory. It was down 1.5 percent on the day.

"The small caps have lost the leadership, and a lot of it is the lack of liquidity with those issues. There's much more liquidity in the large caps right now, and when you're experiencing volatility, institutions tend to run toward the large caps," said Bruce Zaro, chief technical strategist at Bolton Global Asset Management in Boston.

The latest decline was the S&P 500's third in a row and followed signs of an uneven expansion in the U.S. economy. Growth in U.S. factory activity slowed more than expected in September even as hiring in the private sector accelerated.

The CBOE Volatility index (VIX), Wall Street's fear gauge, ended up 2.5 percent.

The day's losses were broad, with all of the 10 S&P 500 sector ending in the red except for utilities.

Among airline stocks, Southwest Airlines (N:LUV) fell 3.6 percent to $32.55 and Delta Air Lines (N:DAL) dropped 3.5 percent to $34.90.

Shares of drugmakers with Ebola treatments in the pipeline were up sharply. U.S. shares of Tekmira Pharmaceuticals (O:TKMR) climbed 18.2 percent.

The Dow Jones industrial average (DJI) fell 238.19 points, or 1.4 percent, to 16,804.71, the S&P 500 (SPX) lost 26.13 points, or 1.32 percent, to 1,946.16 and the Nasdaq Composite (IXIC) dropped 71.31 points, or 1.59 percent, to 4,422.09.

About 8 billion shares changed hands on U.S. exchanges, above the 6.3 billion average for the last five sessions, according to data from BATS Global Markets.

The largest percentage gainer on the New York Stock Exchange was China Green Agriculture (N:CGA), which rose 13.64 percent to $2.25, while the largest percentage decliner was Centrus Energy (N:LEU), which fell 25.27 percent to $7.63.

Among the most active stocks on the NYSE were Brazil's Petrobras (N:PBR), down 6.27 percent at $13.30, and Ford Motor (N:F), down 1.35 percent at $14.59.

On the Nasdaq, Facebook (O:FB), down 3.1 percent at $76.56, was among the most actively traded.

Declining issues outnumbered advancing ones on the NYSE by 2,319 to 760, for a 3.05-to-1 ratio on the downside; on the Nasdaq, 2,123 issues fell and 597 advanced for a 3.56-to-1 ratio.

The benchmark S&P 500 index posted three new 52-week highs and 22 new lows; the Nasdaq Composite recorded 16 new highs and 248 new lows.

(Editing by Nick Zieminski)