* Private U.S. jobs, services sector data disappoint
* AMAT to buy Varian, ConAgra raises Ralcorp bid
* Indexes off: Dow 0.66 pct, S&P 0.69 pct, Nasdaq 0.47 pct (Updates to close, changes byline)
By Rodrigo Campos
NEW YORK, May 4 (Reuters) - Weak economic figures heightened stock investors' anxiety over the extended rally, knocking U.S. shares lower for a third day on Wednesday.
Recent winners in the energy and industrials sectors were hit most, and a key indicator of investor worry rose for a fourth day in what some say is the outset of extended weakness for stocks.
"I think there is a chance that we put the high in for the year," said Doug Kass, founder and president of Seabreeze Partners Management in Palm Beach, Florida.
"Investors should err on the side of conservatism and be increasing their cash positions," he added.
The S&P energy sector, up almost 12 percent so far in 2011, dropped 1.6 percent on Wednesday, while materials fell 1.7 percent and industrials lost 1.4 percent. Dow component Caterpillar Inc lost 2.2 percent to $110.77 on Wednesday but is still up 18.3 percent for the year.
Reports showed activity in the vast U.S. services sector slowed and hiring by private companies was weaker than expected in April. The new orders index in the purchasing managers survey hit its lowest since December 2009.
The releases "call into question the bullish notion of a smooth, self-sustaining recovery," Kass said.
The data also prompted caution before Friday's jobs report for April, one of the most closely watched U.S. economic indicators.
The Dow Jones industrial average lost 83.93 points, or 0.66 percent, to 12,723.58. The Standard & Poor's 500 Index fell 9.30 points, or 0.69 percent, to 1,347.32. The Nasdaq Composite Index dropped 13.39 points, or 0.47 percent, to 2,828.23.
The CBOE volatility index rose 2.3 percent to 17.08 for a rise of more than 17 percent over the past four sessions, shifting its near-term momentum to positive for the first time in more than a month.
"This is the problem area, a potential new uptrend in the VIX," said Larry McMillan, president of McMillan Analysis Corp in a report. "The longer it holds above 16, the more the danger (for the stock market) grows."
In deal news, chip equipment maker Applied Materials Inc offered to buy rival Varian Semiconductor Equipment Associates Inc for $63 per share to get its hands on new technology to meet stronger demand for smartphones and solar equipment.
Varian shares surged 51.3 percent to $61.36 while Applied Materials fell 1 percent to $15.09.
Chip gear maker Novellus Systems jumped 6.5 percent to $32.92.
ConAgra Foods Inc raised its bid for Ralcorp Holdings Inc to $86 a share in cash from $82.
Shares of ConAgra rose 3.1 percent to $25.51, while Ralcorp, which owns the Post cereal brand, jumped 4.9 percent to $87.39.
About 8.6 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, the largest volume since March 18 and above the average 7.74 billion shares traded daily so far in 2011. Volume was below last year's estimated daily average of 8.47 billion.
Decliners outnumbered advancers on the NYSE by a ratio of more than 2 to 1, while on the Nasdaq, more than eight stocks fell for every three that rose. (Reporting by Rodrigo Campos; additional reporting by Leah Schnurr and Doris Frankel; Editing by Kenneth Barry)