* Services sector contraction dampens sentiment
* Bank of America's stock up on plan to repay TARP money
* Dow off 0.8 pct; S&P off 0.8 pct; Nasdaq down 0.5 pct * For up-to-the-minute market news, click [STXNEWS/US] (Updates close with more on payrolls, Bank of America deal and retailers plus Take Two's drop after the bell and volume)
By Caroline Valetkevitch
NEW YORK, Dec 3 (Reuters) - U.S. stocks fell on Thursday after data showed the vast U.S. services sector unexpectedly shrank in November and investors worried that Friday's non-farm payrolls report may show the recovery is sluggish.
Stocks sold off going into the close, led by a slide in financials, as Bank of America Corp's (BAC.N) massive equity offering spurred concerns that other banks could sell new shares and dilute existing shareholders' equity. The S&P financial index .GSPF ended down 2.1 percent. For details, see [ID:nN03119357]
However, shares of Bank of America, parent of the largest bank ranked by assets, ended up 0.7 percent at $15.76 on optimism that its plan to repay $45 billion of government bailout money will free the bank from government restrictions, especially on executive pay.
On the data front, the services sector index fell to 48.7, indicating that this huge component of the U.S. economy had experienced contraction last month, according to a report from the Institute for Supply Management.[ID:nN03409987]
The ISM data hurt sentiment a day before November's unemployment figures are released in an even more influential economic report.
"Given ISM today, and given the rally of the last few days, it may be some nervousness ahead of tomorrow's unemployment number," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia, in reference to the malaise on Wall Street.
"You'll probably see some deterioration in the unemployment rate. One would think you're going to get at least some improvement in the job losses, but it bears being a little cautious."
Economists polled by Thomson Reuters forecast a drop of 130,000 nonfarm jobs in November in Friday's report and an unemployment rate holding steady at 10.2 percent.
The Dow Jones industrial average .DJI dropped 86.53 points, or 0.83 percent, to end at 10,366.15. The Standard & Poor's 500 Index .SPX slipped 9.32 points, or 0.84 percent, to close at 1,099.92. The Nasdaq Composite Index .IXIC fell 11.89 points, or 0.54 percent, to finish at 2,173.14.
After the bell, shares of Take Two Interactive Software Inc (TTWO.O) dropped 7.5 percent to $10.10 as the video game publisher warned about its financial outlook. [ID:nWNAB2034]
During the session, the S&P 500 broke a three-day winning streak. With the S&P 500 up 63 percent from a closing low on March 9, tolerance for disappointing data has worn thin as investors seek justification for stocks' lofty valuations.
Under its pact with U.S. regulators, Bank of America will sell up to $18.8 billion in securities. The rest of the $45 billion will be repaid with cash.
The transaction, once closed, will create a media superpower. for details [ID:nN03267923] GE shed 0.4 percent to $16 on the New York Stock Exchange.
Among the day's other most closely watched numbers, U.S. retailers posted much weaker-than-expected sales for November in a slow kickoff to the holiday shopping season. [ID:nN0381393] .
The Retail HOLDRs ETF RTH.P fell 1.2 percent.
Shares of Abercrombie & Fitch Co (ANF.N), a clothing retailer that caters to teens, dropped 9.3 percent to $36.21. Abercrombie & Fitch's November same-store sales slid 17 percent, much worse than the analysts' average view of a 9.3 percent drop.
The stock of U.S. discount chain Target Corp (TGT.N) fell 2.9 percent to $46.35.
Other data on Thursday showed that the number of U.S. workers filing new claims for unemployment benefits fell last week, according to a government report, while third-quarter productivity was slightly less robust than previously thought, a third report said.
Volume was moderate on the NYSE, with 1.13 billion shares changing hands, well below last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.02 billion shares traded, below last year's daily average of 2.28 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of 2 to 1, while on the Nasdaq, about nine stocks fell for every four that rose. (Reporting by Caroline Valetkevitch; Additional reporting by Leah Schnurr; Editing by Jan Paschal) ((email@example.com; +1 646 223 6393;