U.S. stocks were having their worst day of 2010 on Wednesday as lending restrictions in China worried investors about the global economic recovery, while a conservative outlook from IBM weighed down technology shares.

Official media and banking sources said Chinese authorities instructed some major banks to curb their lending over the rest of this month after an early burst of credit.

Signals that China may curb its economic expansion hurt shares of commodity-related companies, dragging the S&P materials sector <.GSPM> down 2.4 percent.

Concerns over Greek debt helped push the euro to a five-month low against the U.S. dollar, weighing down commodity prices.

You combine what's going on in China with the strength in the dollar and you have an unwind of the commodity trade, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. Then you throw in mediocre earnings relative to expectations, and the market is taking a well-needed correction.

The Dow Jones industrial average <.DJI> dropped 185.61 points, or 1.73 percent, to 10,539.82. The Standard & Poor's 500 Index <.SPX> fell 18.70 points, or 1.63 percent, to 1,131.53. The Nasdaq Composite Index <.IXIC> lost 44.48 points, or 1.93 percent, to 2,275.92.

International Business Machines Corp fell 3.6 percent to $129.34 after an analyst said the company's earnings per share outlook for 2010 implies a slowdown in EPS growth compared to recent years. IBM reported stronger-than-expected quarterly profit after the bell on Tuesday.

On a busy earnings day for U.S. banks, Wells Fargo & Co and U.S. Bancorp reported better-than-forecast quarterly earnings, helped by recent acquisitions, while larger rival, Bank of America Corp, got a boost from Merrill Lynch.

Bank of America , the top U.S. bank by assets, reported a wider-than-expected loss, but said its credit problems were beginning to stabilize.

U.S. Bancorp shares rose 2.3 percent to $25.06 and Bank of America gained 1.3 percent to $16.53. The KBW bank index <.BKX> rose 0.8 percent.

(Reporting by Rodrigo Campos; Editing by Jan Paschal)

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