* U.S. Treasury yields dip due to safety buying
* Bank stocks drop on downbeat outlooks
* Indexes down: Dow 1.58 pct, S&P 500 1.16 pct, Nasdaq 0.5 pct (Updates to close)
By April Joyner
NEW YORK, May 29 (Reuters) - The S&P 500 and the Dow Jones Industrial Average registered their biggest one-day percentage drops in a month on Tuesday as political turmoil in Italy sparked concerns about the stability of the euro zone and shares of U.S. banks tumbled.
Italy has been unable to assemble a coalition government since inconclusive elections in March, which saw the rise of anti-establishment parties that support leaving the euro. The most recent nominee for prime minister failed to secure support from the country's major political parties.
The political crisis in Rome, and the threat to the euro project it represents, triggered a rush to traditional safe havens like U.S. debt, pulling down U.S. 10-year Treasury yields and in turn spurring losses for U.S. banks. Shares of S&P 500 banks registered their biggest one-day decline in more than two months, ending more than 4 percent lower.
"The direct connection between the Italian government and the S&P 500 is tenuous, but it indirectly reminds people of geopolitical uncertainty," said Ed Keon, chief investment strategist at QMA in Newark, New Jersey.
The Dow Jones Industrial Average fell 391.64 points, or 1.58 percent, to 24,361.45, the S&P 500 lost 31.47 points, or 1.16 percent, to 2,689.86 and the Nasdaq Composite dropped 37.26 points, or 0.5 percent, to 7,396.59.
Shares of large U.S. banks were also pressured by downbeat guidance from JPMorgan Chase & Co and Morgan Stanley . JPMorgan's corporate and investment bank chief said his bank's second-quarter markets revenue would be flat compared with a year earlier. The co-head of Morgan Stanley's wealth management division said activity had slowed since March, according to a CNBC report here
JPMorgan Chase shares, which fell 4.3 percent, were the biggest drag on the S&P 500. Morgan Stanley shares dropped 5.8 percent, the second-largest percentage decline on the index.
"It's evolving into not the greatest environment for bank stocks," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
Shares of energy companies were also led lower by a drop in U.S. crude oil futures on expectations that Saudi Arabia and Russia could pump more crude to compensate for a potential supply shortfall.
Declining issues outnumbered advancing ones on the NYSE by a 1.49-to-1 ratio; on Nasdaq, a 1.63-to-1 ratio favored decliners.
The S&P 500 posted seven new 52-week highs and 12 new lows; the Nasdaq Composite recorded 95 new highs and 51 new lows.
Volume on U.S. exchanges was 7.58 billion shares, compared to the 6.58 billion average over the last 20 trading days. (Additional reporting by Medha Singh in Bangalore; Editing by Cynthia Osterman and James Dalgleish)