The Dow industrials and the S&P 500 index fell on Monday as a drop in oil and other commodity prices hurt energy and materials stocks.

But the Nasdaq rose, buoyed by a broker's upgrade in the biotechnology sector.

Light crude futures fell more than 3 percent, settling below $70 a barrel, hurt by concerns about demand despite hopes for economic recovery. The Reuters-Jefferies CRB index of commodities <.CRB> tumbled 2.2 percent, its largest percentage drop in five weeks.

The dollar index <.DXY> rose 0.5 percent after three weeks of declines and further hurt commodity prices, as investors scaled back short positions in anticipation of the Federal Reserve's decision on interest rates later this week.

Energy <.GSPE> and materials <.GSPM> ranked among the S&P 500's worst-performing sectors, with oil services company Halliburton Co down 2.5 percent at $27.45 and petroleum refiner Sunoco off 2.3 percent at $27.79. Shares of diversified chemicals company Dow Chemical lost 2.8 percent to $26.00.

The market has risen in the last several months, based on the idea of the reflation trade, said Chip Hanlon, referring to bets on rising prices of hard assets as the economy recovers.

Hanlon, president of Delta Global Advisors Inc in Huntington Beach, California, said people can expect that when stocks sell off, the U.S. dollar will rally, which will inflict particular pain on raw materials.

The Dow Jones industrial average <.DJI> dropped 41.34 points, or 0.42 percent, to end at 9,778.86. The Standard & Poor's 500 Index <.SPX> fell 3.64 points, or 0.34 percent, to 1,064.66. But the Nasdaq Composite Index <.IXIC> gained 5.18 points, or 0.24 percent, to close at 2,138.04.

The benchmark S&P 500 has risen 57.4 percent off a 12-year closing low in early March, partly because of a strong earnings season that is winding down and optimism that an economic recovery is gaining strength. Investors' appetite for riskier assets had reduced the U.S. dollar's safe-haven appeal.

Adding to the overall negative tone in Monday's session, the Conference Board's index of leading indicators posted a slightly weaker-than-expected gain in August.

Among the top drags on the Dow Jones industrial average was Caterpillar , down 1.8 percent at $52.46 after it said dealer sales of its heavy machinery, engines and turbines fell 48 percent in August, though many markets showed signs of stabilization.

The Dow's leading laggard was American Express Co , down 2.9 percent at $33.76.

The Nasdaq rose slightly after Robert W. Baird upgraded Celgene Corp , pushing the stock up 5 percent to $55.19. The AMEX Biotech index <.BTK> gained 0.8 percent.

Computer maker Dell Inc announced a $3.9 billion proposal to take over Perot Systems Corp
. Perot soared 65.1 percent to $29.56 on the New York Stock Exchange, while Dell's stock slid 4.1 percent to $16.01 on Nasdaq.

Shares of American International Group Inc shot up 21.3 percent to $48.40 after the Government Accountability Office, the watchdog agency of Congress, said the insurer's once desperate financial state has started to stabilize. Representative Congressman Edolphus Towns, a Democrat who chairs the Government Reform Committee, said he would look at easing the terms of the insurer's federal bailout once more.

Volume was below average on the New York Stock Exchange, with about 1.20 billion shares changing hands, compared with last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.42 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancers on the NYSE by a ratio of 2 to 1, while on the Nasdaq, about seven stocks fell for every six that rose.

(Editing by Jan Paschal)