* Jobless claims at almost a three-month low
* Dollar fluctuates on speculation over Fed stimulus
* Pepsi shares down 3.5 pct after outlook trimmed
* Dow off 0.2 pct, S&P down 0.2 pct, Nasdaq up 0.1 pct (Updates to afternoon trade)
By Angela Moon
NEW YORK, Oct 7 (Reuters) - The Dow and S&P 500 fell on Thursday after signs of improvement in the jobs market sparked worries that the Fed may become hesitant to expand its purchases of bonds in an effort to keep interest rates low and stimulate the economy.
The dollar also rebounded after falling to a 15-year low versus the Japanese yen and an all-time low against the Swiss franc earlier in the day.
Wall Street opened higher after data showed weekly jobless claims fell to the lowest in nearly three months. But as investors linked the news to the Fed's quantitative easing policy, the market reversed course, driving the Dow further away from the 11,000 mark. Last month, the Fed hinted at the possibility that it might pump more cash into the U.S. economy, probably through buying bonds, in an additional round of quantitative easing to bolster the anemic recovery from the worst recession since the 1930s.
"If you are looking for more QE, the good jobless claims numbers might actually be bad. You want weaker economic reports, not strong ones, as that would make the Fed become a bit hesitant," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, Tennessee.
The data came ahead of the government's non-farm payroll report on Friday. Economists polled by Reuters forecast that private-sector payrolls added 75,000 jobs in September.
The Dow Jones industrial average was down 19.64 points, or 0.18 percent, at 10,948.01. The Standard & Poor's 500 Index was down 2.49 points, or 0.21 percent, at 1,157.48. The Nasdaq Composite Index was up 2.90 points, or 0.12 percent, at 2,383.56.
PepsiCo Inc trimmed the top end of its earnings forecast, citing a tough economic environment and painting a gloomy early picture of the earnings season that unofficially kicks off with Alcoa Inc after the bell. PepsiCo fell 3.2 percent to $65.94. Alcoa, a Dow component, was down 0.8 percent at $12.27.
The CBOE Volatility Index, or VIX, Wall Street's so-called fear gauge, rose 1 percent to 21.70. But options traders expected the volatility to fall in coming weeks.
Chris McKhann, an analyst at optionMonster.com, said options traders were selling puts -- a contract to sell a stock at a given date and price -- in major indexes while buying puts in volatility indexes. The trades suggest that they are reducing bets that the market will fall, while raising bets that there will be less volatility.
Selling puts on the SPDR S&P 500 exchange-traded fund and
in Nasdaq 100 Index Tracking Stock and buying puts on the CBOE
Volatility Index options and iPath Short-Term VIX Futures
On the upside, Abercrombie & Fitch Co jumped 10.1 percent to $42.48 and American Eagle Outfitters Inc climbed 7.3 percent to $16.15 as teen apparel retailers led the pack with generally stronger-than-expected U.S. same-store sales in September.
Weighing on the Nasdaq 100 was Qualcomm, down 0.6 percent at $44.40. LightSquared, a venture backed by hedge fund Harbinger Capital, said Qualcomm plans to make chips to support a hybrid satellite and wireless communications service it is building. (Reporting by Angela Moon; Editing by Jan Paschal)