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All 10 Standard & Poor's sectors ended more than 1 percent lower and all 30 stocks in the Dow industrials fell. Banks were the biggest decliners as the economic reports painted a glum picture for jobs and manufacturing.

The recent four-day winning streak had some investors pointing to resilience in the market, but Wednesday's decline took the S&P through its 50-day moving average, leaving the market vulnerable to more losses.

"I expected that the S&P would be able to hold onto 1,331 or 1,324," said Roger Volz, director of cash equities at BGC Financial in New York. "The fact that we keep moving deeper into a corrective mode ... puts us on the sidelines for Friday."

In a sign of increased investor caution, the CBOE Volatility index .VIX spiked 18.5 percent while in the U.S. options market became a bit more defensive. About 16.7 million contracts changed hands, with puts outpacing calls by a factor of 1.07:1, according to Trade Alert.

The Dow Jones industrial average .DJI was down 279.42 points, or 2.22 percent, at 12,290.37. The Standard & Poor's 500 Index .SPX was down 30.66 points, or 2.28 percent, at 1,314.54. The Nasdaq Composite Index .IXIC was down 66.11 points, or 2.33 percent, at 2,769.19.

The S&P financial sector .GSPF slumped 3.5 percent with JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N) among the biggest drags. JPMorgan fell 3.4 percent to $41.75 while Bank of America lost 4.3 percent to $11.24. A number of hedge funds are selling the banking sector.

According to ADP, U.S. private employers added a scant 38,000 jobs in May, the lowest since September 2010 and far below what had been expected. Several banks cut their forecasts for Friday's non-farm payroll report from the Labor Department.

"The ADP number suggests that we'll see a weak payroll report on Friday, and it's very possible that soon people will be reducing their GDP forecasts," said Tim Speiss, head of personal wealth advisers at EisnerAmper in New York. "We could see some additional contraction."

Goldman Sachs cut its estimate, saying employers added 100,000 jobs in May versus an original estimate of 150,000. Citigroup cuts its forecast to 100,000 from 170,000.

Wall Street had a dismal start for June, a month that is historically weak for equities. It also ended May with the poorest monthly performance since August.

Manufacturing activity declined sharply in May, according to the Institute for Supply Management's index, which suffered its biggest fall since September 2009.

Wednesday's data was the latest in a string of discouraging reports on home sales, consumer confidence and Midwest business activity.

Automakers tumbled after reporting slightly lower car sales in May as economic weakness and high gas prices pushed consumers to delay purchases. General Motors Co (GM.N) lost 5 percent to $30.23 and Ford Motor Co (F.N) sank 4.6 percent to $14.23.

Almost five stocks fell for every one that rose on the New York Stock Exchange while on the Nasdaq about 81 percent of stocks finished in the negative.

About 8.36 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, slightly under last year's daily average of 8.47 billion. Recently, days of steep declines have corresponded with sharp upticks in trading volume.

(Additional reporting by Doris Frankel, editing by Kenneth Barry)

The ADP Employer Services report showed private employers added a scant 38,000 jobs last month, while April private payrolls were revised down to an increase of 177,000 from the previously reported 179,000. Economists surveyed by Reuters had forecast a gain of 175,000 jobs for May.

The report is jointly developed with Macroeconomic Advisers LLC.

"Obviously a much weaker-than-expected report, hinting that Friday's nonfarm data will also be weaker than expected," said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto, referring to the U.S. Labor Department's monthly non-farm payrolls report due for Friday.

"We've seen general softening in U.S. data, and that's a concern about how the recovery is maintaining itself. Markets are starting to turn their attention to this."

U.S. stock index futures added to losses following the report, while the greenback extended losses against the yen and euro. Government debt prices extended earlier gains.

The ADP figures come ahead of the government's much more comprehensive labor market report on Friday, which includes both public and private sector employment.

That report is expected to show a rise in overall nonfarm payrolls of 180,000 in May, slowing down from a gain of 244,000 the month before. Private payrolls are expected to come in at 205,000.

Economists often refer to the ADP report to fine-tune their expectations for the payrolls numbers, though it is not always accurate in predicting the outcome.

(Reporting by Leah Schnurr, additional reporting by Steve Johnson, Editing by Chizu Nomiyama)

ADP employment data, due at 8:15 a.m. EDT (1215 GMT), is expected to show U.S. private employers added 175,000 jobs in May, according to a Thomson Reuters poll of analysts, down slightly from 179,000 in April. The report comes ahead of the closely watched non-farm payrolls data Friday and after a batch of recent indicators suggested slowing growth.

The Institute for Supply Management's monthly factory indicator, due at 10 a.m. EDT (1400 GMT), is seen easing to 57.7 from the prior month's 60.4. Supply chain disruptions after the Japanese earthquake and tsunami are being blamed for pushing the index lower this month.

Construction spending for April is expected to show a rise of 0.3 percent after March's increase of 1.4 percent. The data is also due at 10 a.m. EDT. (1400 GMT)

S&P 500 futures shed 1.2 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 23 points, and Nasdaq 100 futures fell 5.25 points.

Yahoo Inc (YHOO.O) shares dipped almost 1 percent to $16.41 in premarket trading after two sources said it resolved a dispute with partner Alibaba Group over the Chinese company's transfer of its prized online payments unit to Chief Executive Jack Ma.

Sprint Nextel Corp (S.N) asked U.S. regulators to block AT&T Inc's (T.N) proposed $39 billion purchase of T-Mobile USA, saying the deal has "no public interest benefit" and would harm competition.

European stocks were steady early Wednesday, halting a week-long recovery rally as investors awaited U.S. jobs data, looking for more insight on the world's biggest economy. .EU

Wall Street bulls took the upper hand with a 1 percent rally on Tuesday as hopes for a new bailout for Greece relieved some investor worry, but grim economic data suggested more hurdles ahead as the S&P 500 closed out its worst month since August.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

With Athens fighting to avoid defaulting on its debt, the country's central bank chief dismissed as "improbable and ridiculous" any suggestion that Greece might ditch the euro and return to its drachma national currency.

Inspectors on the "troika" team from the European Union, IMF and European Central Bank are in Athens to decide whether to release a tranche of 12 billion euros next month to keep Greece afloat. Partly due to IMF demands, discussions on a new package that would meet Greece's needs up to 2014 are also taking place.

Asked when the review would be concluded, one source said: "Tomorrow if we are lucky, but it could also be Friday."

A German finance ministry spokesman said Berlin expected the Troika to report on Friday evening at the earliest and that Germany expected the European Union and the International Monetary Fund to remain involved jointly in any continued aid program for Greece.

Sources said that whether Athens gets the fifth tranche of aid under its existing 110 billion euros EU/IMF bailout will depend on senior EU finance officials who are gathered in Vienna and on euro zone finance ministers, who may meet earlier than their next scheduled talks on June 20.

European officials are holding talks in the Austrian capital to sketch out options for a second bailout package, with private sector participation still under discussion to help relieve the country of its massive debt burden.

A Greek source with knowledge of the Athens negotiations was optimistic that Greece would get the latest slice of money to cover its budget deficit and meet debt repayments.

"There will be a way for the disbursement of the fifth installment to be approved," he told Reuters. "The negotiations with the troika will be concluded today or tomorrow, the latest by Friday. The new assessment will include measures to speed up privatizations, to cut spending and increase revenues."

A new package for Greece, expected to total around 65 billion euros according to EU officials, could involve a mixture of collateralized loans from the EU and International Monetary Fund, and additional revenue measures.

It would involve unprecedented intrusive external supervision of the privatization program, which has yet to sell anything since the rescue a year ago.

Deputy Greek Prime Minister Theodoros Pangalos will chair a ministerial meeting on Wednesday on moves to shrink the public sector as Athens scrambles to cut its wage bill further.

"IMPROBABLE AND RIDICULOUS"

Greece's plight has prompted some comment that it should leave the euro zone rather than continue spreading its problems to other countries in the bloc through market "contagion."

Central bank Governor George Provopoulos dismissed such a scenario when he unveiled a report analyzing the impact of climate change on Greece's economy in the next 90 years.

This report "is a clear answer to various improbable and ridiculous scenarios making the rounds recently. I remind you that all the calculations on the cost-benefit analysis contained in the report are in euros," Provopoulos, who is also a ECB Governing Council member, told a conference.

A member of the junior party in Germany's coalition government called on Tuesday for Greece to exit the euro zone, which it joined in 2001.

Having the euro means that Greece cannot devalue its currency to make its economy more competitive. However, engineering a devaluation by resurrecting the drachma would massively increase the burden of its debt which would remain denominated in euros.

Data on Wednesday showed how the economy is suffering under the debt crisis and austerity measures already imposed by the state under the IMF/EU bailout.

Greece's manufacturing economy shrank at its fastest pace in three months in May, with weak domestic demand forcing firms to cut jobs and prices, a PMI survey showed.

Gross domestic product is seen shrinking 3.0 percent this year after a 4.5 percent decline in 2010.

(Additional reporting by Lefteris Papadimas in Athens and Christiaan Hetzner in Berlin; writing by David Stamp; editing by Mike Peacock)