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US STOCKS-Wall St drops as investors face stimulus impasse

(For a live blog on the U.S. stock market, click or type LIVE/ in a news window)

* Walgreens rises on 2021 profit growth forecast

* CBOE volatility index hits one-week high

* Weekly jobless claims unexpectedly rise in latest week

* Indexes: Dow -0.10%, S&P 500 -0.32%, Nasdaq -0.79% (Updates to afternoon)

Oct 15 (Reuters) - U.S. stocks dropped on Thursday as a rise in weekly jobless claims compounded worries about a stalling economic recovery and fading hopes for more fiscal aid before the election.

The number of Americans filing new claims for jobless benefits rose to a two-month high last week, stoking fears the COVID-19 pandemic was inflicting lasting damage to the labor market.

A separate report showed manufacturing activity in New York State fell more than expected in October.

“Going into the fall it will be difficult for unemployment to make a lot of positive headway because of the lack of stimulus,” said Christopher C. Grisanti, chief equity strategist, MAI Capital Management in Cleveland.

President Donald Trump said he is willing to raise his offer of $1.8 trillion for a COVID-19 relief deal with Democrats in the U.S. Congress, but the idea was shot down by his fellow Republican, Senate Majority Leader Mitch McConnell.

The CBOE volatility index, investors’ fear gauge, hit a one-week high and Wall Street’s indexes fell for the third straight day. The S&P 500 is down about 3% from its Sept. 2 record high close.

With less than 20 days until the Nov. 3 election, Trump and Democratic challenger Joe Biden are set to hold dueling prime-time town halls on Thursday instead of their second presidential debate, which was canceled after Trump declined to take part in a virtual matchup.

“More of what moves the market will be the crystallizing of who is going to win the presidency, and how close the Senate races are,” said Tom Martin, senior portfolio manager at Globalt Investments in Atlanta.

A Biden presidency, coupled with a Democratic Senate, would likely mean a larger fiscal stimulus plan than what a Republicans Senate would agree to. However, Biden is also widely seen on Wall Street as likely to raise taxes.

Focus is also on the quarterly results for corporate America, with expectations for third-quarter earnings improving to an 19% drop from a 25% tumble forecast on July 1, according to Refinitiv IBES data.

Morgan Stanley edged 1.4% higher after it beat third-quarter profit estimates, winding up mixed results from major U.S. lenders. Recent bank earnings reports saw those focused on trading clocking big gains, while retail banks took a hit from the COVID-19 pandemic.

The S&P 500 financials index added 0.6%, while communication services fell nearly 1%, the steepest decline among 11 sectors.

The Dow Jones Industrial Average was down 0.1% at 28,484.1 points, while the S&P 500 lost 0.32% to 3,477.54.

The Nasdaq Composite dropped 0.79% to 11,675.81.

Walgreens Boots Alliance Inc gained 4% as the drugstore chain forecast single-digit profit growth in 2021 after reporting a better-than-expected fourth-quarter profit.

The S&P 1500 airlines index shed 1.7% after United Airlines reported a 78% drop in quarterly revenue.

Shares of drug developer Vertex Pharmaceuticals Inc sank 20% after it discontinued its trial of a protein deficiency disorder treatment.

Declining issues outnumbered advancing ones on the NYSE by a 1.06-to-1 ratio; on Nasdaq, a 1.10-to-1 ratio favored decliners.

The S&P 500 posted 13 new 52-week highs and no new lows; the Nasdaq Composite recorded 47 new highs and 30 new lows. (Additional reporting by Medha Singh and Shivani Kumaresan in Bengaluru Editing by Nick Zieminski)

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