US STOCKS-Stocks tumble to lowest close in over six months as Middle East tensions drag

Recasts with preliminary close of trading

By Chuck Mikolajczak and Purvi Agarwal

March 27 (Reuters) - U.S. stocks tumbled on Friday, with weakness in megacap stocks sending each of the three major U.S. indexes to their lowest closing levels in over six months, as the month-long Middle East war continued to suppress risk appetite.

Markets took little solace from U.S. President Donald Trump's announcement that he gave Iran another 10 days to reopen the Strait of Hormuz or face the destruction of its energy plants, after Iran rejected his proposals to end the war he launched in tandem with Israel.

Secretary of State Marco Rubio said the U.S. could achieve its objectives in Iran without the use of any ground troops and expected its operation to conclude in a matter of weeks, despite recent deployments of additional forces to the region.

U.S. crude CLc1 settled up 5.46% at $99.64 a barrel and Brent LCOc1 rose 4.22% to settle at $112.57 per barrel, but they were little changed on the week.

The Dow, S&P 500 and Nasdaq each suffered their fifth straight weekly decline, the longest such streak in nearly four years. On Thursday, the Nasdaq confirmed it was in correction territory - commonly defined as a drop of 10% from its prior high. The Russell 2000 .RUT, which was the first on the correction path, confirmed it last Friday.

"Clearly, the overall tone has turned very negative and now we have broken down into correction territory," said Ken Polcari, partner and chief market strategist at SlateStone Wealth in Jupiter, Florida.

"In the end, I would view this as a big opportunity, but would not be surprised if we see a drawdown anywhere between 15% to 20% before it is over."

According to preliminary data, the S&P 500 .SPX lost 110.20 points, or 1.70%, to end at 6,366.96 points, while the Nasdaq Composite .IXIC lost 458.84 points, or 2.14%, to 20,949.24. The Dow Jones Industrial Average .DJI fell 803.60 points, or 1.75%, to 45,156.51.

The CBOE Volatility Index .VIX, considered Wall Street's fear gauge, touched its highest level since March 9.

Megacaps were the biggest drag on the benchmark S&P index, with Nvidia NVDA.O down about 2% as the biggest weight, while Amazon AMZN.O dropped about 4%.

Software shares were also under renewed selling pressure, with the S&P 500 software and services index .SPLRCIS falling to its lowest level since April 7.

Along with pressure from Amazon, consumer discretionary stocks .SPLRCD were the worst-performing of the 11 major S&P sectors, as cruise operator Carnival CCL.N slumped after cutting its annual adjusted profit forecast. Fellow cruise operator Norwegian NCLH.N also fell sharply.

The surge in oil prices along with other products such as fertilizer as a result of the Iran war has fanned inflation fears and dampened expectations that the Federal Reserve and other central banks have room to lower interest rates.

Money market participants are not pricing in any easing from the U.S. Federal Reserve this year, compared with expectations of two cuts before the conflict broke out, according to CME's FedWatch Tool. Markets are now pricing in a roughly 25% chance for a hike of at least 25 basis points at the Fed's October meeting.

Philadelphia Fed President Anna Paulson acknowledged the risks to the economy from the war, but did not specify what it meant for monetary policy in the near term.

U.S. consumer sentiment eased to a three-month low in March, raising concerns about the economy due to the Middle East war.

(Reporting by Chuck Mikolajczak in New York; Additional reporting by Purvi Agarwal and Twesha Dikshit in Bengaluru; Editing by Pooja Desai and Matthew Lewis)

((charles.mikolajczak@tr.com; @chuckmik.bsky.social))