* Microsoft falls after Goldman downgrade
* Dollar strength hurts commodity-related stocks
* Stocks shrug off pending home sales, factory orders
* Indexes off: Dow 0.9 pct, S&P 1 pct, Nasdaq 1.3 pct (Updates to early afternoon)
By Chuck Mikolajczak
NEW YORK, Oct 4 (Reuters) - U.S. stocks fell on Monday after a brokerage downgrade of bellwether Microsoft and a rebound by the U.S. dollar spurred investors to book profits after a strong September.
The dollar's recent slide had boosted commodities companies and those U.S. firms winning a sizable sales from abroad.
Microsoft Corp was a drag on both the Dow and Nasdaq 100, dropping 2.3 percent to $23.83 after Goldman Sachs downgraded the software maker, citing a slow recovery in PC sales and competition from tablet computers, which do not include Windows software.
The dollar rebounded as news from Ireland, Portugal and Greece renewed concerns about the financial stability and dented the euro.
"We had a lot of good news on Friday, including a weak dollar that helped a lot of commodities and multinationals. That we are seeing reversed today," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
"Ireland's budget issues and concerns over Spain and whether the whole sovereign debt crisis continues to unfold in a negative manner are hurting the euro, boosting the dollar and weighing on stocks."
The Dow Jones industrial average dropped 94.68 points, or 0.87 percent, to 10,735.00. The Standard & Poor's 500 Index shed 11.26 points, or 0.98 percent, to 1,134.98. The Nasdaq Composite Index lost 30.31 points, or 1.28 percent, to 2,340.44.
Industrial materials stocks fell, with U.S. Steel Corp off 3.5 percent to $42.07 and Alcoa down 2.4 percent to $11.94. The S&P Materials index lost 1.7 percent.
The S&P 500 recently finished its best quarter in a year, posting a gain of nearly 9 percent in September, although the index has been struggling to break out of the 1,130-1,150 range.
S&P 500 short-term technical indicators showed a sell signal. The benchmark index's 10-day momentum line fell below zero, indicating a short-term trend reversal, while the trend lines of the moving average convergence-divergence (MACD) indicator crossed at oversold levels.
U.S. pending home sales rose more than expected in August and factory orders fell slightly more than forecast, but stocks were largely unmoved by the data.
The third-quarter earnings season begins unofficially this week when Alcoa reports results on Thursday. Micron Technology Inc, PepsiCo Inc and Monsanto Co are also set to report this week. (Additional reporting by Edward Krudy; Editing by Kenneth Barry)