* Microsoft lower after Goldman downgrade
* Switzerland sets new rules for Credit Suisse, UBS
* Pending home sales rise, factory orders edge lower
* Indexes off: Dow 1 pct, S&P 1.1 pct, Nasdaq 1.5 pct (Updates to midday, changes byline)
By Chuck Mikolajczak
NEW YORK, Oct 4 (Reuters) - U.S. stocks fell about 1 percent on Monday after a brokerage downgrade of Microsoft and new capital rules set by Switzerland revived worries about the European banking system.
Swiss regulators will require global banks UBS AG and Credit Suisse to hold far more capital than their international rivals to prevent a crisis. The new rules could crimp corporate profits.
"It is an overhanging issue of uncertainty out there that certainly has been weighing on the financial sector in general, which has been weak," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.
The Dow Jones industrial average dropped 103.27 points, or 0.95 percent, to 10,726.41. The Standard & Poor's 500 Index fell 12.82 points, or 1.12 percent, to 1,133.42. The Nasdaq Composite Index lost 34.80 points, or 1.47 percent, to 2,335.95.
The S&P 500 recently finished its best quarter in a year, with September boasting a gain of nearly 9 percent for the index, although the S&P has been struggling to break out of the 1,130-1,150 range.
Concerns about Europe's banking system have been a sore spot for U.S. stocks in recent months, even as some improving domestic data showed a stabilizing economy and reduced worries about a double-dip recession.
Microsoft Corp was among the top drags on both the Dow and Nasdaq 100, dropping 2.1 percent to $23.88 after Goldman Sachs downgraded the stock to "neutral," citing competition from tablet computers.
The solid third-quarter showing for markets may have prompted some profit-taking as investors reallocated their holdings.
"It could easily be some profit-taking after one of the best months on record in the stock market. Admittedly it was off a depressed base, but some profit-taking after that big run-up would not be unexpected," added Solaris' Ghriskey.
Pending home sales rose more than expected in August, indicating the U.S. housing market was regaining some stability, but August factory orders fell slightly more than forecast. Stocks were largely unmoved by the data.
This week marks the unofficial start of the third-quarter earnings season, with Alcoa Inc due to report on Thursday. Micron Technology Inc, PepsiCo Inc and Monsanto Co are all set to report this week.