US STOCKS-Wall St falls after ISM, construction spending data

* U.S. manufacturing sector shrinks for 3rd straight month-ISM

* U.S. July construction spending posts largest drop in a year

* Spain, Italy yields fall as ECB speculation grows

* Stocks off: Dow 0.6 pct, S&P 0.5 pct, Nasdaq 0.4 pct

By Angela Moon

NEW YORK, Sept 4 (Reuters) - U.S. stocks edged lower on Tuesday after data showed manufacturing in the United States shrank at its sharpest clip in more than three years in August, the third monthly contraction in a row, raising concerns about the state of the economy.

Separate data also showed U.S. construction spending in July fell by the most in a year as both the private and public sectors cut back on investment, according to a report that could dampen hopes of a pick-up in economic activity in the third quarter.

"Given everything we see internationally in terms of demand for our manufacturers, a little slowdown is to be expected, especially with the euro zone still under pressure and emerging economies experiencing relatively slow growth," said Patrick O'Keefe, director of economic research at J.H. Cohn.

The Dow Jones industrial average dropped 78.79 points, or 0.60 percent, to 13,012.05. The Standard & Poor's 500 Index fell 7.15 points, or 0.51 percent, to 1,399.43. The Nasdaq Composite Index lost 13.56 points, or 0.44 percent, to 3,053.41.

Investors are now awaiting comments from European Central Bank President Mario Draghi after the bank's meeting on Thursday. Many investors will look to the ECB meeting to glean strong clues on what to expect from the Federal Open Market Committee's own policy meeting on Sept. 12-13.

The all-important payrolls report due Friday will also be closely watched. The employment report will be the final major economic report to affect the results of the upcoming meeting of the Federal Open Market Committee (FOMC).

U.S. stocks rose on Friday after Federal Reserve Chairman Ben Bernanke, expressing "grave concern" for the stagnating U.S. job market, said the central bank was prepared to take further steps to strengthen the economy if necessary.