* Banking, materials sectors hardest hit
* About 97 percent of NYSE stocks in negative territory
* Some analysts view slide as a time to buy
* Dow off 3 pct, S&P down 4 pct, Nasdaq off 4.2 pct
* For up-to-the-minute market news see [STXNEWS/US] (Updates to afternoon trading, changes byline)
By Ryan Vlastelica
NEW YORK, Aug 8 (Reuters) - Investors fled stocks on Monday in the first session since Standard & Poor's cut the United States' perfect AAA credit rating, reflecting growing discouragement about the economic outlook and Washington's ability to meet the challenges.
Monday's sharp losses extended the slide on Friday, when Wall Street wrapped up its worst week in more than two years on concerns about flagging economic growth and fears of a financial meltdown in the euro zone. The S&P 500 is down nearly 16 percent from its closing high reached on April 29, putting it solidly in correction territory.
The CBOE Volatility Index <.VIX>, Wall Street's "fear gauge," jumped 21.2 percent to 39.04, after topping 40 for the first time since May 2010 at its intraday peak.
While all 10 S&P sectors fell more than 1 percent, the groups most sensitive to the economy, such as banking and commodities, were the hardest hit. The S&P financial index <.GSPF> sank 5.9 percent while an S&P energy index <.GSPE> lost 4.5 percent.
"The downgrade was more of a psychological blow that piled onto a market that was already reeling," said Mike Gibbs, managing director and chief market strategist at Morgan Keegan in Memphis, Tennessee.
"When you get this kind of panic and fear into the market, it goes beyond any realistic or sensible level. I wouldn't put all my money in stocks right now. I'd hold some back."
The Dow Jones industrial average <.DJI> dropped 345.91 points, or 3.02 percent, to 11,098.70. The Standard & Poor's 500 Index <.SPX> slid 48.04 points, or 4.01 percent, to 1,151.34. The Nasdaq Composite Index <.IXIC> lost 105.47 points, or 4.16 percent, to 2,426.94.
Late on Friday after the market's close, S&P cut the U.S. long-term credit rating by onenotch to AA-plus on concerns about debt levels in the world's largest economy. The downgrade could eventually raise borrowing costs for the U.S. government and companies, as well as for consumers. For details, see [ID:nLDE77500Z]
In Monday's session, Bank of America Corp
United States Steel Corp
Monday's selling extended to other assets, with U.S. crude oil futures down about 4 percent, or $3.36, at $83.52 a barrel.
Gold, which is seen as a safe haven, surged 4.1 percent to above $1,714 an ounce and rose above platinum prices for the first time since December 2008.
Even the European Central Bank's dramatic intervention in bond markets, which pushed down yields on Spanish and Italian bonds, was not enough to stem selling. [ID:nLDE7770NM]
GETTING CLOSE TO A BOTTOM?
But some analysts noted the mass selling has made some stocks attractive at lower prices.
"This is a very oversold market that has come down far too rapidly," Gibbs said. "We're due for a bounce and the opportunity for one is good at the levels we're at. Still, it's nearly impossible to pick a bottom in this environment."
Barclays Capital, in a note to clients, wrote that the decline created a "time to buy," and that the recent losses "left equity valuations at levels of cheapness not seen since the early 1980s."
Declining stocks outnumbered advancing issues on the New York Stock Exchange by a ratio of 30 to 1, while on the Nasdaq, decliners beat advancers nearly 8 to 1.
In company news, Verizon Communications Inc