Stocks fell on Thursday as concerns over rising yields on euro zone debt outweighed another round of improved U.S. economic data.

Spanish bond yields hit 6.98 percent, their highest level since 1997, at a 10-year auction, while a French bond auction also saw high yields.

Losses were capped after data showed U.S. claims for jobless benefits hit a seven-month low last week, while permits for future home construction rebounded strongly last month, bolstering views the economy was gaining traction.

You can focus on the good data here, the corporate data, the economic data saying we are not in a recession. We are probably growing a little bit faster in the fourth quarter than we were in the third quarter, and that is a good sign, said John Canally investment strategist and economist for LPL Financial in Boston.

But at the end of the day, bond yields in Europe will rule.

The 7 percent mark is viewed by investors as unsustainable, with both Greece and Portugal forced to seek bailouts after yields hit similar levels.

The Dow Jones industrial average <.DJI> dropped 49.87 points, or 0.42 percent, at 11,855.72. The Standard & Poor's 500 Index <.SPX> took off 7.00 points, or 0.57 percent, at 1,229.91. The Nasdaq Composite Index <.IXIC> was down 14.57 points, or 0.55 percent, at 2,625.04.

Investors have recently struggled to weigh the threat of a deepening European crisis against U.S. economic data that has been better than expected.

Economic data still on tap includes the Philadelphia Federal Reserve Bank's November business activity survey at 10 a.m. EST.

Sears Holdings Corp's quarterly loss almost doubled as weak demand at its Sears and Kmart stores hurt sales, it reported early Thursday. Shares slumped 8.7 percent to $62.35.

Applied Materials Inc lost 3.6 percent to $12.02 as the chip gear maker gave a cautious revenue outlook late Wednesday and warned it expects to be affected by a tough economy.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)