* S&P 500, Dow post worst days since mid-May
* Tech sector off 1.8 pct; Apple, Microsoft among biggest drags
* Banks prop up market after Fed stress tests
* Rite Aid slumps after Walgreens terminates deal
* Indexes down: Dow 0.78 pct, S&P 0.86 pct, Nasdaq 1.44 pct (Updates to close of U.S. markets)
By Lewis Krauskopf
June 29 (Reuters) - Wall Street fell sharply on Thursday, with the S&P 500 and the Dow industrials suffering their worst daily percentage drops in about six weeks, as a recent decline in technology shares deepened and outweighed strength in bank shares.
The technology sector, which has led the S&P 500's 8-percent gain for the year, dropped 1.8 percent, and were the worst-performing major group. Declines in big tech stocks, including Apple and Microsoft, weighed the most on the benchmark S&P.
Financials and energy were the only sectors in positive territory as investors may have been rotating into groups that have lagged this year.
"U.S. equities have remained extended, at or close to record territory for an extended period of time really without a tremendous amount of conviction in the market," said Peter Kenny, senior market strategist at Global Markets Advisory Group, in New York.
"It’s really been treading water. Without a major stimulus to drive prices higher, equities have to reset and that’s what they’re doing today," Kenny said.
The Dow Jones Industrial Average fell 167.58 points, or 0.78 percent, to 21,287.03, the S&P 500 lost 20.99 points, or 0.86 percent, to 2,419.7 and the Nasdaq Composite dropped 90.06 points, or 1.44 percent, to 6,144.35.
The Nasdaq closed below its 50-day moving average for the first time since April 13, breaking below a key technical support level.
The CBOE Volatility index, the widely followed barometer of expected near-term stock market volatility, rose to a six-week high of 15.16, before paring some of the move.
Equity investors also may be concerned about the rise in interest rates globally, as a slew of hawkish comments from central banks signaled the beginning of the end of ultra-loose monetary policy. European stocks also declined.
With the second quarter coming to a close, the market has experienced a volatile few days. Just on Wednesday, the tech-heavy Nasdaq had posted its best day since Nov. 7.
Financials were the bright spot for the stock market, rising 0.7 percent.
Bank stocks gained after the U.S. Federal Reserve approved the banks' plans to raise dividend payouts and share buybacks under its annual stress test program. Wells Fargo shares rose 2.7 percent while Citigroup gained 2.8 percent.
Energy inched 0.1 percent higher. Oil prices edged up after a decline in weekly U.S. crude production temporarily eased concerns about oversupply.
"There's a slight rotation," said Omar Aguilar, chief investment officer for equities at Charles Schwab Investment Management. "You see the sectors that are underperforming are the ones that have done the best. Tech stocks are feeling the pain today, but it's more of a technical reversal."
Investors have been concerned about tepid U.S. economic growth as the Fed is raising interest rates from very low levels.
Data showed the U.S. economy slowed less sharply in the first quarter than initially estimated due to unexpectedly higher consumer spending and a bigger jump in exports.
In corporate news, Rite Aid shares slumped 26.5 percent after Walgreens Boots Alliance scrapped its deal to buy Rite Aid after failing to win antitrust approval, but said it would instead buy nearly half of the smaller rival's U.S. stores.
Walgreens also ended a related deal to sell as many as 1,200 Rite Aid stores to Fred's Inc, sending Fred's shares down 22.8 percent. Walgreens shares rose 1.7 percent.
Blue Apron Holdings shares ended flat in their market debut following the meal-kit delivery company's watered down IPO in the shadow of Amazon.com's deal to buy Whole Foods Market.
Nike shares rose after the market closed following the company's quarterly results.
Declining issues outnumbered advancing ones on the NYSE by a 2.38-to-1 ratio; on Nasdaq, a 1.69-to-1 ratio favored decliners.
About 7.9 billion shares changed hands in U.S. exchanges, above the roughly 7.3 billion daily average over the last 20 sessions. (Additional reporting by Kimberly Chin in New York and Ankur Banerjee and Tanya Agrawal in Bengaluru; Editing by Arun Koyyur and Nick Zieminski)