* U.S. manufacturing grows more than expected
* Pending home sales surge in September
* Research in Motion falls after downgrade
* Dow up 0.2 pct, S&P off 0.2 pct, Nasdaq off 0.5 pct (Updates to early afternoon)
By Leah Schnurr
NEW YORK, Nov 2 (Reuters) - The S&P 500 and the Nasdaq fell on Monday, with the market surrendering early gains, as investors fretted that the seven-month rally was running out of steam.
Indexes had jumped about 1 percent earlier in the session as stronger-than-expected data on manufacturing and pending home sales spurred broad-based gains and soothed worries over the strength of the recovery.
But by early afternoon, many of the sectors, including financials, that had led the upside gave up their gains. The KBW bank index .BKX> was off 0.4 percent, while CIT Group Inc plummeted 63 percent to 26 cents one day after filing for prepackaged bankruptcy.
"I think we've got a situation where the smart people really believe the market should be sold here ... we need a real correction," said Jeffrey Frankel, president of Stuart Frankel & Co in New York.
The Nasdaq fared worst than the other indexes after Citigroup cut its rating on Research In Motion Ltd to "sell" from "buy." Shares of the BlackBerry maker tumbled 6.1 percent to $55.16.
The Chicago Board Options Exchange volatility index .VIX>, a closely watched gauge of investor sentiment, rose 0.7 percent to 30.90. The VIX saw its biggest one-day percentage gain in a year on Friday as U.S. stocks sold off more than 2 percent.
The Dow Jones industrial average added 15.04 points, or 0.15 percent, to 9,727.77. The Standard & Poor's 500 Index was off 1.92 points, or 0.19 percent, to 1,034.27. The Nasdaq Composite Index lost 9.28 points, or 0.45 percent, to 2,035.83.