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* Industrials fall after weak ISM manufacturing data
* E*Trade Financial, Charles Schwab lead declines on S&P 500
* McDonald's drops on JPM comments
* Indexes end: Dow -1.28%, S&P 500 -1.23%, Nasdaq -1.13% (Updates to close)
By Noel Randewich
Oct 1 (Reuters) - The S&P 500 and Dow suffered their worst tumbles in over a month on Tuesday after data showed U.S. factory activity shrank in September to its weakest in over a decade, ratcheting up fears that the U.S.-China trade war is hobbling the world's largest economy.
Investors moved to the safety of U.S. Treasuries after the ISM report showed its manufacturing activity index at 47.8, falling further from August's sharp contraction and below economists' expectations of 50.1. A reading below 50 indicates contraction.
With lingering trade tensions weighing on exports, the U.S. data mirrored similar patterns in the euro zone, Japan, the United Kingdom and China.
The S&P industrials index dropped 2.4%, the most among the 11 major S&P sectors. The materials and energy indexes both fell 2.3%. All 11 sectors lost ground.
A jobs report on Friday is expected to shed further light on U.S. economic strength.
"This is a bad number, fitting in with the world’s manufacturing recession," Jim Bianco, head of Bianco Research in Chicago, said of the ISM report. "I think the market is right to be concerned, but we will have to see whether other manufacturing numbers in the U.S. bear that out, not the least of which being the manufacturing payroll numbers on Friday."
Despite a prolonged U.S.-China trade war that has hammered global growth, confidence in the domestic economy has helped the benchmark S&P 500 climb about 17% this year.
Thomas Simons, a Jefferies economist, said the manufacturing contraction does not underpin a wider softening in the U.S. economy, as it was the result of several factors, including Boeing Co's production issues relating to its best-selling jets.
"Manufacturing itself is in a recession, but it does not mean that the overall economy is in a recession."
The Dow Jones Industrial Average fell 1.28% to end at 26,573.04, while the S&P 500 lost 1.23% to 2,940.25. Both indexes had their biggest one-day dip since Aug. 23, when U.S. President Donald Trump demanded that American companies seek alternatives to doing business with China.
The Nasdaq Composite dropped 1.13% to end at 7,908.69.
Shares of online brokerage E*Trade Financial tumbled 16.4%, the most on the S&P 500, after rival Charles Schwab Corp said it would remove commissions for online trading of stocks, ETFs and options listed on U.S. or Canadian exchanges.
Charles Schwab's shares slumped 9.7%.
McDonald's Corp dropped 2.7% after JP Morgan said the fast food chain's third-quarter same-store sales would be softer than analysts' estimates.
Shares of chipmaker Xilinx Inc declined 4.1% after KeyBanc lowered its rating to "sector weight."
Ulta Beauty Inc advanced 6.1% after an independent director bought shares.
As the final quarter of 2019 kicks off, investors will be focusing on a range of factors, beginning with the high-stakes Sino-U.S. trade talks in early October, corporate earnings and the Fed's next policy meeting.
Declining issues outnumbered advancing ones on the NYSE by a 2.76-to-1 ratio; on Nasdaq, a 3.29-to-1 ratio favored decliners.
The S&P 500 posted 12 new 52-week highs and 9 new lows; the Nasdaq Composite recorded 28 new highs and 131 new lows.
Volume on U.S. exchanges was 7.3 billion shares, compared with the 7.2 billion average for the full session over the last 20 trading days. (Additional reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Nick Zieminski and Dan Grebler)