* U.S. air strike in Iraq kills head of Iran’s Quds Force
* Manufacturing sector contraction sparks slowdown concerns
* Bank, airline stocks tumble; defense stocks rise
* Indexes down: Dow 0.61%, S&P 0.47%, Nasdaq 0.52% (Updates to late afternoon, changes byline, adds NEW YORK dateline)
By April Joyner
NEW YORK, Jan 3 (Reuters) - Wall Street fell from record highs on Friday after a U.S. air strike in Iraq ratcheted up tensions in the Middle East and a bigger-than-expected contraction in the U.S. manufacturing sector raised concerns of slowing economic growth.
Demand for safe-haven assets soared as Iran vowed revenge for the killing of Qassem Soleimani, head of its elite Quds Force, in an air strike authorized by U.S. President Donald Trump.
In a further blow to U.S. market sentiment, data from the Institute for Supply Management showed that U.S. factory activity contracted in December by the most in more than a decade.
S&P 500 bank stocks dropped 1.4% as the news sent benchmark U.S. bond yields to their lowest since Dec. 12.
Shares of airlines also tumbled as oil prices jumped about 3%. American Airlines Group Inc shares dropped 4.4%, while shares of United Airlines Holdings Inc fell 2.0%.
Among the S&P 500’s 11 major sectors, only real estate , utilities and consumer staples - all considered defensive plays - were trading higher.
Shares of U.S. defense companies jumped on news of the air strike. Northrop Grumman Corp shares climbed 5.3%, and Lockheed Martin Corp shares rose 3.3%. The two provided the biggest boosts to the S&P 500.
“Markets don’t like risk, and with the killing of the Iranian general, we may have an elevated level of counterattacks,” said Wayne Wicker, chief investment officer of Vantagepoint Investment Advisers in Washington.
Still, the market disturbance could be fleeting, according to Wicker. “We’ve looked at many types of conflicts over the last 20 years, and they’ve had much more of a short-term impact,” he said.
In a sign of investor jitters on Friday, Wall Street’s major indexes extended their fall following a false report of an attack on a U.S. military base in Iraq.
By contrast, release of minutes from the December policy meeting of the Federal Reserve, in which policymakers agreed interest rates would likely stay on hold for “a time,” had little impact on U.S. stocks.
The Dow Jones Industrial Average fell 176.25 points, or 0.61%, to 28,692.55, the S&P 500 lost 15.37 points, or 0.47%, to 3,242.48 and the Nasdaq Composite dropped 47.26 points, or 0.52%, to 9,044.93.
Among advancers, Tesla Inc shares hit a record high and were last up 3.5% after the automaker beat estimates for vehicle deliveries in the fourth quarter.
Lamb Weston Holdings Inc shares surged 11.6%, the biggest percentage gain on the S&P 500, after the frozen foods supplier’s quarterly results surpassed estimates.
Shares of retailer L Brands Inc rose 7.7% after Bank of America upgraded its rating on the company’s stock.
Declining issues outnumbered advancing ones on the NYSE by a 1.17-to-1 ratio; on Nasdaq, a 1.68-to-1 ratio favored decliners.
The S&P 500 posted 19 new 52-week highs and one new low; the Nasdaq Composite recorded 52 new highs and 12 new lows. (Reporting by Manas Mishra and Medha Singh in Bengaluru; Editing by Anil D’Silva, Shounak Dasgupta and Bill Berkrot)