* China shares fall 6.7 pct
* Financial stocks lower
* Commodities slide; oil down more than 4 pct
* Indexes off: S&P 1 pct, Dow 0.8, Nasdaq 1.1
(Updates to late morning)
By Edward Krudy
NEW YORK, Aug 31 (Reuters) - U.S. stocks fell on Monday after a sharp drop in Chinese equities called into question whether asset prices have raced ahead of an economic recovery.
The selling mainly hurt shares in industrial and natural resource companies as commodities prices slumped. But financial stocks were also dented on fears they may be over valued after a strong run-up and following bearish comments from Barron's.
Recent slides in Chinese stocks have caused jitters in global stock markets that have rallied strongly in recent months, with the S&P 500 up around 50 percent since March. A 6.7 percent dive in the Shanghai Composite Index to a three-month closing low on Monday reignited those concerns.
"Investors in the United States felt it was important for China to help lead the path to economic recovery," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. "If their markets are going to misbehave, it opens the question of whether they are going to see a recovery."
The Dow Jones industrial average fell 79.88 points, or 0.84 percent, at 9,464.32. The Standard & Poor's 500 Index lost 10.65 points, or 1.04 percent, at 1,018.28. The Nasdaq Composite Index fell 22.64 points, or 1.12 percent, at 2,006.13.
Chinese stocks recorded their second-biggest monthly loss in 15 years, and traders said the sell-off sparked a fall in the price of oil and other commodities on fears demand in the world's third economy may be weaker than thought.
Oil dropped more than 4 percent to below $70 a barrel, and copper prices slid from 11-month highs.
In New York, shares in natural resource companies fell. Exxon Mobil Corp dropped 0.8 percent to $69.51 while miner Freeport-McMoRan Copper & Gold Inc fell 3.4 percent to $63.24. Caterpillar Inc fell 2.6 percent to $45.51.
Weighing on the financial sector, Barron's said the stock of American International Group Inc was overpriced after soaring more than 50 percent last week and also recommended investors take profits in Citigroup Inc, which dropped 3 percent to $5.07. AIG fell 6.5 percent to $47.02.
Banc of America-Merrill Lynch cut its rating on the stock of Morgan Stanley to "neutral" from "buy," sending the shares down 3 percent to $28.61.
The announcement of two large mergers failed to lift overall sentiment. Baker Hughes Inc, an oilfield services company, said it would buy smaller rival BJ Services Co for $5.5 billion, and Walt Disney Co said it would buy Marvel Entertainment Inc for $4 billion.
Shares in Marvel, famous for its stable of characters such as Iron Man, Spider-Man and the Fantastic Four, rocketed 26 percent to $48.71 while BJ Services added 7 percent to $16.53.
A regional report that showed manufacturing in the U.S. Midwest was on the cusp of expansion did little to boost sentiment, with all three major indexes falling around 1 percent by mid-morning.
The Institute for Supply Management-Chicago said on Monday its index of Midwest business activity rose in August to 50.0 from 43.4 in July.