US STOCKS-Wall St plunges on services' sector woe

(Updates to midday)

By Ellis Mnyandu

NEW YORK, Feb 5 (Reuters) - U.S. stocks tumbled on Tuesday after a report showed activity in the vast services sector unexpectedly slumped to a level not seen since the previous recession, aggravating investor worries that a similar contraction is at hand.

Declines were broad-based, although banks and other financial services stocks fell particularly hard on worry that the service-sector slowdown would crimp demand for loans and other capital investments.

Shares of telecommunications companies, whose products serve as the backbone of the services industry, also tumbled.

Insurer American International Group Inc (AIG.N: Quote, Profile, Research) led the Dow's decliners with a drop of nearly 4 percent on fears about credit exposure. Investment bank Goldman Sachs & Co (GS.N: Quote, Profile, Research) shares slid more than 3 percent after a broker downgrade, while Bank of America Corp (BAC.N: Quote, Profile, Research), the No. 1 U.S. bank by market value, sunk more than 2 percent.

A slide in the shares of energy companies such as Exxon Mobil Corp (XOM.N: Quote, Profile, Research) was another headwind, with oil prices down on concerns an economic downturn will slow energy demand.

"The decline today reflects a market that's completely driven by fear," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. "We are defensive, and we think you need to play defense for a little bit longer."

The Dow Jones industrial average .DJI was down 232.65 points, or 1.84 percent, at 12,402.51. The Standard & Poor's 500 Index .SPX was down 27.79 points, or 2.01 percent, at 1,353.03. The Nasdaq Composite Index .IXIC was down 39.74 points, or 1.67 percent, at 2,343.11.