* U.S. Treasury yields dip due to safety buying
* Bank stocks decline in tandem with bond yields
* Indexes down: Dow 1.56 pct, S&P 1.17 pct, Nasdaq 0.62 pct (Updates to early afternoon)
By Medha Singh
May 29 (Reuters) - Volatility returned to Wall Street with a vengeance on Tuesday, with downbeat guidance on trading from JP Morgan and worries over Italy putting the S&P and Dow Jones Industrial Average on track for the biggest one-day drop in a month.
Political crisis in Italy triggered a rush to safe-haven assets as the prospects of a repeat election in euro zone's third largest economy raised doubts about the country's future in the economic bloc. Some major bank stocks sank as much as 5 percent after JP Morgan corporate and investment bank chief Daniel Pinto suggested second-quarter markets revenue would be flat on the year, driving 1.7 percent and 1.2 percent falls in the Dow and the S&P, respectively.
If the losses sustain to the closing bell, those would be the biggest daily falls since April 24 and the first of more than 1 percent drop in May. "Notwithstanding what the banks themselves are saying, I'm actually a bit skeptical about loan volume growth in a high rate environment," said Peter Cecchini, Managing Director and Chief Market Strategist at Cantor Fitzgerald in New York.
"And you see the yield curve flattening, the two 2-10 spread to closest to the flattest to the year, and that's bad for the profitability of the banks."
The Dow dived below its 50-day moving average, a key technical level that represents short-term momentum, for the first time since May 9, while the S&P 500, which opened below its 100-day moving average, was only a few points away from breaching that level.
Yield on the benchmark U.S. 10-year Treasury notes yield fell to their lowest level since mid-April to 2.84 percent.
"There's been a bit of a pullback in yields and obviously with the contraction on the curve, there could be implications from a financial standpoint in terms of the banks' businesses that are tied to interest rates," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
At 12:46 p.m. EDT the Dow Jones Industrial Average was down 386.69 points, or 1.56 percent, at 24,366.40, the S&P 500 was down 31.95 points, or 1.17 percent, at 2,689.38 and the Nasdaq Composite was down 46.15 points, or 0.62 percent, at 7,387.70.
The only gainers were the interest rate sensitive utilities , real estate companies.
Reporting by Medha Singh and additonal reporting by Sinead Carew in New York; Editing by Arun Koyyur