Stocks fell for a third straight day on Friday on disappointing housing and durable goods data, while Research In Motion's lackluster results dented optimism about technology spending.

Economic reports showed that new orders for long-lasting U.S. manufactured goods fell by their biggest margin in seven months, while August sales of new home fell short of Wall Street's expectations, raising questions about the strength of the recovery.

With the benchmark S&P 500 having risen almost 60 percent from 12-year lows in early March, the tolerance threshold of less-than-stellar economic data has diminished as investors seek justification for the strong runup in stocks.

Economically sensitive stocks bore the brunt of the selloff, including technology, big manufacturers, banks, home builders and some consumer companies.

Shares of Research In Motion , down 17.04 percent to $68.91, were a top drag on Nasdaq, a day after the maker of BlackBerry devices posted quarterly revenue below Wall Street's forecasts and offered a disappointing outlook.

The data on the health of the residential market and durable goods do not support a quick recovery thesis, said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.

We need to see some data points that are leading us in the right direction.

The Dow Jones industrial average <.DJI> fell 42.25 points, or 0.44 percent, to 9,665.19. The Standard & Poor's 500 Index <.SPX> dropped 6.40 points, or 0.61 percent, to 1,044.38. The Nasdaq Composite Index <.IXIC> declined 16.69 points, or 0.79 percent, to 2,090.92.

A rise in shares of companies which fare better in an uncertain economy, including Coca-Cola Co , helped indexes finish the session off their worst levels. Even so, the S&P 500 snapped a two-week winning streak and suffered its biggest weekly drop since early July.

For the week, the S&P 500 fell 2.2 percent, the Dow dropped 1.6 percent and the Nasdaq declined 2 percent.

Wal-Mart Stores Inc , off 2.4 percent to $49.47, was the Dow's worst drag, followed by United Technologies Corp , down 1.3 percent to $61.54.

Homebuilder KB Home slumped 8.5 percent to $16.96 after reporting a wider-than-expected quarterly loss and its chief executive warned he does not expect meaningful improvement in the U.S. housing market in the near future.

The Dow Jones home construction index <.DJUSHB> declined 2.8 percent.

Shares of credit card company American Express Co fell 2.3 percent to $33.07, while JPMorgan declined 1.6 percent to $43.65. The S&P financial index <.GSPF> shed 1.1 percent.

Before this week's selling, stocks had rallied sharply for six months on expectations that the recovery was gaining traction.

But besides worrying about the recovery, the market also is nervous that authorities might curb stimulus measures too soon.

Volume was moderate, with about 1.20 billion shares changing hands on the New York Stock Exchange, compared with last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.39 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones by a ratio of about 6 to 5 on the NYSE, while on Nasdaq about 4 stocks fell for every 3 that rose.

(Editing by Kenneth Barry)