(Updates with closing prices)

NEW YORK, Sept 3 (Reuters) - Stocks spun lower on Tuesday, with the broad market suffering its worst decline in nearly a year, after weak U.S. manufacturing data whipped up fears a tepid economic rebound will crimp corporate profits.

The Standard & Poor's 500 index (CBOE:^SPX - News) chalked up its biggest one-day percentage drop -- down 4.15 percent -- since the market reopened after the Sept. 11 attacks. The harrowing decline made investors question whether Wall Street will keep crawling back from 5-year lows struck in July.

"It's a broken record of concerns about the economy, taking down earnings numbers," and corporate governance issues, said Peter Gottlieb, portfolio manager at First Albany Asset Management. "At the beginning of August, we had some sense that we had established a bottom, but now the market doesn't seem so sure."

Indeed, the market got off to a bad start in September, historically the worst month for stocks with an average fall of 0.4 percent in the last 50 years. New evidence that the expansion in the U.S. factory sector may have stalled sent investors scrambling out of stocks, fearful that poor prospects for corporate profits could knock the wind out of Wall Street's recent rally.

Intel Corp. (NasdaqNM:INTC - News) sank 5 percent after a bearish call ahead of the company's financial update due on Thursday, and Citigroup (NYSE:C - News) slumped more than 10 percent after an investment house cut the banking giant to a rare "sell" rating as lawmakers take a closer look at the company's corporate governance.

The broad Standard & Poor's 500 index (CBOE:^SPX - News) slumped 38.18 points, or 4.15 percent, to 878.02, according to the latest available figures. It was the index's biggest percentage drop since it plunged 4.92 percent on Sept. 17, 2001.

The blue-chip Dow Jones industrial average (CBOT:^DJI - News) sank 355.45 points, or 4.1 percent, to 8,308.05, while the technology-laced Nasdaq Composite Index (NasdaqSC:^IXIC - News) surrendered 51.01 points, or 3.88 percent, to 1,263.84.

The Institute for Supply Management's closely watched index of factory business conditions was unchanged in August at 50.5, posting a seventh month of growth but missing expectations for a rise to 51.6. New orders, a key source of future growth, fell for the first time since last November.

"That's a real big letdown for the few folks who were becoming bullish," said Charles Payne, market analyst at Wall Street Strategies.

Skittish investors flocked to traditional havens such as U.S. Treasuries and gold stocks, and the dollar weakened as sharp declines in world stock markets and the weak U.S. data raised the specter of diminished capital flows to the United States.

While stocks may have looked cheap enough to lure investors when they hit multiyear lows in late July, prices seem far less seductive since the market's late-summer rally -- especially as analysts race to reduce their earnings estimates.

"The mood is very defensive. It's just very cautious," said Larry Wachtel, a market analyst at Prudential Securities. "Investors can't think of anything that will put the market into high gear."

Wall Street was closed on Monday for the Labor Day holiday, while European and Asian markets began the new month with sharp declines.

Intel fell 81 cents to $15.86, weighing on the Dow and Nasdaq. Investment house Lehman Brothers lowered its third-quarter revenue forecast for the world's No. 1 semiconductor maker ahead of the company's update due on Thursday, citing poor demand and the lack of future orders.

Major chip suppliers including Intel, LSI Logic Corp. (NYSE:LSI - News) and others are hosting mid-quarter financial updates over the next week. Several are expected to moderate their growth expectations for 2002. The Philadelphia Stock Exchange semiconductor index (Philadelphia:^SOXX - News) dropped 5.1 percent.

Citigroup slumped $3.36 to $29.39, ranking as the largest percentage loser on the Dow. Investors are worried about a widening probe into how the financial services giant allocated shares of initial public offerings.

Also on Tuesday Prudential Securities downgraded Citigroup shares to "sell," a rare rating on Wall Street, on concerns about lower earnings and legal risk as lawmakers take a closer look at the company's corporate governance.

Chartered Semiconductor Manufacturing Ltd. (NasdaqNM:CHRT - News) tumbled $2.79, or 23.5 percent, to $9.06. Investment bank JP Morgan downgraded the world's third-largest contract maker of microchips to market underperformer from market performer after the company announced a $633 million fund raising plan.

International Business Machines Corp. (NYSE:IBM - News) fell $3.03 to $72.35, a drop of 4 percent. About 4,000 people are likely to lose their jobs as IBM completes its acquisition of PricewaterhouseCoopers LLC's consulting arm, the Wall Street Journal reported.

A patchy pile of economic data in recent weeks has helped erode hopes for a strong rebound in soggy corporate profits, and Wall Street analysts are rapidly ratcheting down earnings estimates.

Analysts now expect operating earnings at S&P 500 companies to rise 11.2 percent on average in the third quarter, according to Thomson First Call. While that is hardly a dour outlook, analysts at the start of July were expecting an average profit of 16.6 percent.

A drop of more than 5 percentage points in just about two months is a huge move historically, said Joe Cooper, market analyst at Thomson, who said earnings estimates normally fall about 1 percentage point a month.

"Analysts had been looking for a very rapid recovery in the second half of this year, kind of the same pattern that we've been looking at for the last three years," Cooper said. "They are going to get the recovery this time, but the slope of that recovery is much gentler than forecast."