U.S. stocks fell sharply on Wednesday as an unexpected fall in business activity in the U.S. Midwest sparked worries about the pace of economic recovery.

Wall Street gave up initial gains after the Institute for Supply Management-Chicago's business barometer fell to 46.1 in September, a reading that indicates a contraction in the regional economy. It was lower than a reading of 50.0 in August and the analyst consensus forecast of 52.0.

Manufacturing will be a key contributor to the (third-quarter) GDP rebound with the question always being sustainability. But with final demand still sluggish, there is only so much of an improvement that we will see, and today's number highlights that risk, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

Disappointing numbers also came from the ADP National Employment Report, a precursor to the government's own jobs report due on Friday, which showed job cuts in September in the private sector were greater than analysts expected.

The market was also weighed by CIT Group Inc , down 39.1 percent at $1.34 after a news report late on Tuesday that the troubled commercial lender is likely to be handed over its bondholders.

The Dow Jones industrial average <.DJI> was down 110.11 points, or 1.13 percent, at 9,632.09. The Standard & Poor's 500 Index <.SPX> was down 11.59 points, or 1.09 percent, at 1,049.02. The Nasdaq Composite Index <.IXIC> was down 25.06 points, or 1.18 percent, at 2,098.98.

But Nike shares jumped 7.1 percent to $64.38, capping some losses for the S&P 500 index, after Goldman Sachs raised its rating on the apparel and footwear maker to buy from neutral. The upgrade comes a day after the company posted a higher quarterly profit that beat estimates.

The stock market's early gains were helped by the U.S. Commerce Department's final reading on gross domestic product for the second quarter, which showed GDP fell at a 0.7 percent annual rate, lower than the Reuters analyst consensus forecast of a 1.2 percent fall.

The S&P is up 14.1 percent for the third quarter, which ends Wednesday. The index is up 16.1 percent for 2009 and up 55 percent from a 12-year low in early March.

(Reporting by Angela Moon; Editing by Padraic Cassidy)

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