* Bank stocks fall; gold and VIX shoot up
* Target up on smaller drop in comparable sales
* Indexes down: Dow 0.89 pct, S&P 0.86 pct, Nasdaq 1 pct (Updates to open)
By Yashaswini Swamynathan
May 17 (Reuters) - U.S. stocks were sharply lower on Wednesday after reports of a leaked memo by former FBI chief James Comey caused alarm on Capitol Hill, raising questions about whether President Donald Trump tried to interfere with a federal investigation.
Trump asked Comey to end a probe into former National Security Adviser Michael Flynn's ties with Russia, according to the reports.
The latest development could distract Trump from pursuing his proposed policies such as tax cuts and simpler bank regulations, which have underpinned a record-setting rally on Wall Street.
The news comes on the heels of a tumultuous week at the White House when Trump unexpectedly fired Comey and then disclosed classified information to Russia's foreign minister about a planned Islamic State operation.
Bank stocks, which have outperformed in the post-election rally, were the worst hit. The S&P 500 financial sector dropped 1.67 percent, led by losses in Bank of America and JPMorgan.
Goldman Sachs was the biggest drag on the Dow.
The dollar index sank on Wednesday, erasing all of the gains inspired by Trump's business-friendly stance after his November election victory. The euro hit its highest level since Nov. 7, while prices of gold hit a one-month high.
The VIX, Wall Street's "fear gauge", shot up to 12.8 points and was on track for its biggest one-day percentage increase since August.
"Equity investors are beginning to display concerns over the domestic political situation that is not likely to suddenly vanish," Peter Cardillo, chief market economist at First Standard Financial wrote.
"The equity markets have ignored the noise out of Washington. However, we think the situation is likely to change as this crisis leads to an interruption of the pro-growth White House agenda, deflating the Hope Rally."
At 9:52 a.m. ET (1352 GMT), the Dow Jones Industrial Average was down 185.86 points, or 0.89 percent, at 20,793.89, the S&P 500 was down 20.52 points, or 0.86 percent, at 2,380.15 and the Nasdaq Composite index was down 61.63 points, or 1 percent, at 6,108.24.
Eight of the 11 major S&P 500 sectors were lower.
Traditionally defensive sectors utilities, consumer staples and real estate were higher.
Target was up 4.8 percent at $57.10 after the big-box retailer reported a smaller-than-expected drop in comparable sales.
AbbVie slipped 2.4 percent to $65.25 after Coherus BioSciences received a favorable patent ruling against AbbVie's Humira drug. Coherus shares rose nearly 7 percent to $23.55.
Declining issues outnumbered advancers on the NYSE by 2,213 to 529. On the Nasdaq, 2,126 issues fell and 379 advanced.
The S&P 500 index showed three new 52-week highs and 14 new lows, while the Nasdaq recorded 15 new highs and 44 new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty)