* Indexes at seven-week closing lows
* Homebuilders fall on housing data, recover somewhat
* Indexes down: Dow 1.3 pct, S&P 1.5 pct, Nasdaq 1.7 pct (Updates to close)
By Leah Schnurr
NEW YORK, Aug 24 (Reuters) - U.S. stocks fell to their lowest level in seven weeks on Tuesday as an unexpectedly large drop in home sales ratcheted up concerns that the economic recovery is even weaker than had been feared.
The Dow and S&P 500 racked up their fourth day of losses in a row after an industry group reported that sales of U.S. existing homes in July fell to their slowest pace in 15 years.
"What's really driving us is the sense that the economic outlook is unraveling a bit," said Bernie McSherry, senior vice president at Cuttone & Co in New York.
With housing a linchpin of the U.S. consumer economy, the latest data cast doubt on the pace of recovery and adding fuel to investors' recent search for safety.
Prices of U.S. Treasuries soared, sending two-year yields to another record low. On the S&P 500, defensive plays telecoms and utilities were the only sectors to gain for the day.
Economically sensitive companies were the biggest drags on the Dow, including plane maker Boeing, which fell 3.7 percent to $60.93. Banks were also among hardest hit shares, with the KBW Bank index down 2.2 percent.
Home building and related stocks slipped but came off their lows after hitting technical support. The PHLX housing index fell 1.1 percent to 89.53, clawing back from a 3 percent drop after it encountered support near its July low, right above 87.
The Dow Jones industrial average fell 133.96 points, or 1.32 percent, to 10,040.45. The Standard & Poor's 500 Index shed 15.49 points, or 1.45 percent, to 1,051.87. The Nasdaq Composite Index lost 35.87 points, or 1.66 percent, to 2,123.76.
The broad Russell 2000 index was down 1.2 percent at 595.59, but held above its July intraday low of 587.67.
A report that at least seven of the 17 top Federal Reserve officials at the U.S. central bank's August policy meeting had reservations about the decision to buy more Treasuries also rattled investors.
Some bargain hunting helped the indexes ease off lows. The S&P approached short-term oversold levels, dropping below 35 on the 14-day relative strength index. A level of 30 indicates the index could be oversold. The S&P also fell below its lower Bollinger band at around 1,053.
Medical device maker Medtronic Inc plunged 10.8 percent to $31.21 after it reported a decline in quarterly sales and cut its outlook. The drop weighed on shares of rival companies, and the health-care sector -- traditionally a defensive group -- fell 2 percent.
Merger and acquisitions activity continued to play a role in the market, with news on takeover target 3PAR Inc.
Dell Inc is preparing to sweeten its offer for 3PAR, according to a Bloomberg report. The move comes a day after Hewlett-Packard Co bid $1.6 billion for the data storage company, topping Dell's original offer.
Shares of 3PAR gained 3.6 percent to $27.04, while Dell fell 3 percent to $11.59. HP, a Dow component, slid 1.7 percent to $38.39.
All three indexes closed at their lowest level in seven weeks. (Editing by Leslie Adler)