* VIX jumps above 43 on Wall Street's nervousness
* Philly Fed factory index at lowest in 2 1/2 years
* Fed scrutinizing European banks' US units-report
* Dow falls 3.7 pct, S&P down 4.5 pct, Nasdaq off 5.2 pct
* For up-to-the-minute market news see [STXNEWS/US] (Updates to close)
By Ashley Lau
NEW YORK, Aug 18 (Reuters) - Rising fears of another recession hammered U.S. stocks on Thursday, sending major averages sharply lower in a return to the extreme fluctuations investors endured a week ago.
New worries about the health of European banks set the tone before the market's open, and a dismal report on regional U.S. manufacturing fueled a downward spiral in which the Dow dropped as much as 528 points, spurring a flight to safe-haven assets like gold.
The Nasdaq ended more than 5 percent lower, the S&P 500 more than 4 percent and the blue-chip Dow off more than 3 percent.
"Are we going to go into recession? Most market participants were looking for slow and steady growth, but the statistics and the financial situation here and in foreign economies have disturbed that view," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.
The Dow Jones industrial average <.DJI> fell 419.63 points, or 3.68 percent, to 10,990.58, while the Standard & Poor's 500 Index <.SPX> declined 53.24 points, or 4.46 percent, to 1,140.65, and the Nasdaq Composite Index <.IXIC> dropped 131.05 points, or 5.22 percent, to 2,380.43.
The losses resumed a slide in stocks that began in late July and seemed to moderate in the last few days. In a more worrisome sign, volume was heavier than on recent positive days, with 11.4 billion shares changing hands, highest so far this week.
Volatility jumped, with the CBOE Volatility Index <.VIX> or VIX, a barometer of Wall Street anxiety, up 38 percent at 43.56. More investors were taking out protective positions against declines in the market.
The S&P 500 is now off 16.4 percent from its April 29 closing high, but the benchmark index still ended above its slump on Aug. 9 at 1,101.54.
Sectors associated with growth were hit hard. Top drags on
the Dow included shares of IBM
Adding to fears of a another recession, a survey of U.S. Mid-Atlantic factory activity by the Philadelphia Federal Reserve Bank showed a drop in August to its lowest level since March 2009. For details, see [ID:nN1E77H0E8]
Hewlett-Packard Co
Bank shares also fueled the market's declines, with the KBW Banks Index <.BKX> down 5.6 percent.
A Wall Street Journal report said regulators are scrutinizing the financial health of U.S. units of Europe's biggest banks more closely. For details, see[ID:nL5E7JI0Q]
Among Wall Street bank stocks, Citigroup Inc
Shares of luxury retailer Tiffany & Co
Economists at Morgan Stanley lowered the outlook for global growth and said the United States and the euro zone are "dangerously close to recession." (Reporting by Ashley Lau; Additional reporting by Ryan Vlastelica; Editing by Kenneth Barry)