U.S. stocks fell on Thursday after a sharp drop in European equities ignited by rumors of a short-selling ban in Germany swept away early euphoria from Warren Buffett's investment in Bank of America.

The FTSEurofirst 300 index <.FTEU3> of top European shares fell 1.3 percent and Germany's DAX <.GDAXI> dropped as much as 4 percent to its session low on rumors Germany could enact a short-selling ban following the example of other European nations. A German Finance Ministry spokesman told Reuters they are not planning a general short-selling ban.

You don't get a 3 percent move for no apparent reason without it raising a red flag, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

What is now pressuring stocks is this obviously out-of-character move that we saw in the German DAX.

Markets have been increasingly sensitive to developments in the euro-zone region, given the area's persistent sovereign debt crisis and concerns about European banks' stability.

Four nations, including Spain and Italy, banned short-selling on certain stocks earlier in the month in an attempt to stabilize markets, and on Thursday, they announced that ban would remain in place until September 30.

Stocks opened higher on Thursday after Bank of America said Berkshire Hathaway , Warren Buffett's conglomerate, would be taking a $5 billion stake in the bank, whose shares fell to two-year lows earlier this week.

Apple Inc fell 1.3 percent to $371.49 a day after co-founder Steve Jobs resigned as chief executive, keeping the Nasdaq negative. Apple is the second-largest company in the S&P 500 by market capitalization.

The Dow Jones industrial average <.DJI> slid 169.15 points, or 1.49 percent, to 11,151.56 The Standard & Poor's 500 Index <.SPX> lost 18.44 points, or 1.57 percent, to 1,159.16. The Nasdaq Composite Index <.IXIC> dropped 40.99 points, or 1.66 percent, to 2,426.70.

There was a brief euphoria and people used that platform to sell, said Randy Billhardt, head of institutional sales and trading at MTV & Co. in New York.

Bank of America said it would sell Buffett's Berkshire 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend. Bank of America, a Dow component, jumped 11.9 percent to $7.82, although it was still down for the month.

But the KBW banks index <.BKX> reversed its earlier gains by midday and was down 0.2 percent. The S&P financials index <.GSPF>, which had been the only S&P sector in positive territory earlier in the session, also gave up those gains and declined 0.6 percent. The index had earlier climbed as much as 4.7 percent to a session high.

Traders remained on tenterhooks ahead of a keenly awaited address by Federal Reserve Chairman Ben Bernanke at a meeting of central bankers on Friday. Many are waiting to see whether Bernanke will provide concrete action for further monetary stimulus or simply outline rough guidelines for propping up the ailing economy.

(Reporting by Ashley Lau; Additional reporting by Richard Leong; Editing by Jan Paschal)