U.S. stocks fell on Thursday after analyst downgrades hit the telecom sector and investors booked profits in technology stocks, with enthusiasm also fading over results from bank stress tests.

Telecom companies Verizon and AT&T were among the top drags on the blue-chip Dow Jones industrials index after JP Morgan downgraded both companies to neutral from overweight, citing slowing subscriber growth and pricing pressures. Caterpillar shares were the biggest drag on the Dow, falling more than 4 percent.

Tech stocks fell despite stronger-than-expected results from tech bellwether Cisco Systems after the close on Wednesday.

Cisco fell 2.8 percent to $19.07 and was among the top drags on the Nasdaq, along with large-cap techs Apple and Qualcomm , each down more than 3 percent.

The tech sector has had a nice run since the beginning of the year and investors have been going into it because of its high free cash flow, high percentage of cash and strong balance sheets, said Greg Woodard, Portfolio Strategist at Manning & Napier Advisors, Inc. in Fairport, New York.

A lot of assets have moved into the area, and I don't think it's unhealthy to see some pullback from a sector that has been so strong.

The Dow Jones industrial average <.DJI> dropped 82.35 points, or 0.97 percent, to 8,429.93. The Standard & Poor's 500 Index <.SPX> shed 7.43 points, or 0.81 percent, to 912.10. The Nasdaq Composite Index <.IXIC> fell 35.60 points, or 2.02 percent, to 1,723.50.

The S&P Telecom Services index <.GSPL> slid 2.8 percent while the PHLX Semiconductor index <.SOXX> tumbled 5.7 percent.

The results of government stress tests on the ability of the 19 largest banks to weather a deep recession will be released at 5 p.m. and are expected to show about half of the banks need more capital.

Leaked test results on Wednesday gave investors some clarity over how well the industry will cope with perhaps the most severe recession since World War II, pushing the S&P 500 index to its best close since January 6.

Enthusiasm over financial stocks dissipated on Thursday as the KBW Bank index <.BKX> fell 1 percent after climbing more than 7 percent earlier.

It's a little bit of the old saying 'sell on good news', said Carl Birkelbach, Chairman and CEO of Birkelbach Investment Securities in Chicago.

Yesterday the stocks went up on good news the stress test is not going to be that severe and a lot of banks are in good shape, and I think there might be some selling on good news here.

Even so, Bank of America Corp rose nearly 10 percent to $13.95 and was the top boost to the Dow after being upgraded by two analysts.

Several retailers reported better-than-expected monthly sales figures, offering fresh evidence that consumers' willingness to spend is increasing.

Wal-Mart Stores Inc , the world's largest retailer reported April sales that topped analysts' forecasts. The shares climbed 1 percent to $50.

Despite the encouraging monthly sales results, the S&P Retail index <.RLX>, which does not include Wal-Mart, shed 1 percent.

Government data showed the number of workers filing new claims for jobless aid unexpectedly fell last week to its lowest reading since late January, while U.S. productivity grew at a slightly higher-than-expected rate as firms cut back sharply on employment to protect profits.

Since hitting a 12-year closing low in March, the S&P has surged 35 percent, driven by optimism about the financial system's condition and hopes the recession may be waning.

(Reporting by Chuck Mikolajczak; additional reporting by Ryan Vlastelica; editing by Padraic Cassidy)