Wall Street drops on US home sales

Sales of previously owned U.S. homes fell unexpectedly in August, a bump in the road for the housing market's comeback.

"The market is very extended. It's had a huge run here," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. "We are susceptible to bad news and maybe it's the correction everyone has been waiting for."

Sentiment was also dampened as several major central banks said they would scale back injections of U.S. dollars into their banking systems.

The news came a day after the U.S. Federal Reserve gave a more upbeat assessment of the economy and suggested it would start to reduce support for financial markets, which caused a late-day selloff in stocks.

The Dow Jones industrial average (.DJI) was down 41.03 points, or 0.42 percent, at 9,707.52. The Standard & Poor's 500 Index (.SPX) shed 8.73 points, or 0.82 percent, at 1,052.14. The Nasdaq Composite Index (.IXIC) slid 24.64 points, or 1.16 percent, at 2,106.78.

Stocks initially bounced at the open after the government said the number of U.S. workers filing new claims for jobless benefits unexpectedly fell, and a less volatile unemployment claims gauge dipped to an eight-month low.

The Dow Jones home construction index (.DJUSHB) dropped 1.2 percent after the homes sales data, with homebuilders Lennar Corp (LEN.N) off 2 percent and KB Home (KBH.N) down 1.9 percent.