* ISM manufacturing lowest in three years
* Delta among suitors for Virgin Atlantic stake - sources
* Retail stocks weak on the day, but AMD rallies
* Dow off 0.3 pct, S&P off 0.3 pct, Nasdaq off 0.1 pct
NEW YORK, Dec 3 (Reuters) - U.S. stocks fell on on Monday, with the S&P 500 and Nasdaq erasing early gains as disappointing U.S. factory numbers curbed optimism spurred by positive data on China's economy.
Manufacturing in the United States surprisingly contracted in November, according to the Institute for Supply Management, dropping to its lowest level in more than three years. Economic data has been mixed in recent months, sparking new worries about the pace of economic growth at a time when investors are already concerned about the "fiscal cliff" issue in Washington.[ID:nL 1 E8N3580]
Markets had opened higher as output by China's factories grew in November for the first time in more than a year, data showed. Investors look to strength from China, the world's second-largest economy, to offset weak growth in the United States and Europe.
Still, the fiscal cliff remains investors' primary focus, with political haggling continuing over how to deal with large automatic spending cuts and tax hikes scheduled to kick in next year that could tip the U.S. economy back into recession.
"Markets have lately been more optimistic than what the reality of the negotiations seems to be, and the reality of that may be starting to set in," said David Carter, chief investment officer at Lenox Wealth Advisors in New York. "Until the cliff gets resolved, market upside may be capped while the downside isn't constrained."
The Dow Jones industrial average was down 39.57 points, or 0.30 percent, at 12,986.01. The Standard & Poor's 500 Index was down 3.97 points, or 0.28 percent, at 1,412.21. The Nasdaq Composite Index was down 3.22 points, or 0.11 percent, at 3,007.02.
The S&P 500 briefly moved above its 50-day moving average at about 1,420, a level that the index has been below since Oct. 22, and now serving as a key resistance point for equities.
U.S. Treasury Secretary Timothy Geithner pushed Republicans on Sunday to offer specific ideas to cut the deficit. He predicted that they would agree to raise tax rates on the rich to obtain a year-end deal to avoid the fiscal cliff.
Among other factors serving to offset the ISM report were two developments in the euro zone: Spain formally requested the disbursement of more than $50 billion of European funds to recapitalize its crippled banking sector, while Greece said it would spend 10 billion euros ($13 billion) to buy back bonds in a bid to reduce its ballooning debt.
The PHLX Europe sector index rose 0.3 percent.
"The general feeling underneath here is things are improving - Europe appears to be improving, at least politically getting their act together," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
Dell shares gained 4.4 percent to $10.06. The stock was one of the biggest percentage gainers in both the S&P 500 and Nasdaq 100 after Goldman Sachs upgraded its view on the stock to "buy" from "sell."
Advanced Micro Devices was the S&P's top gainer, rising 8.2 percent to $2.38. Option traders appeared to be betting on further gains ahead. Early options order flow was focused on upside April calls, including a sweep of 3,594 April $3.50 strike calls for 16 cents per contract when the market was 14 cents to 16 cents, said WhatsTrading.com options strategist Frederic Ruffy.
Retail stocks were among the weakest of the day, with J.C. Penney Co off 3.4 percent to $17.33, and Big Lots Inc down 2.5 percent at $27.47. Staples Inc lost 1.6 percent to $11.51. Consumer discretionary names tend to underperform during periods of economic uncertainty as consumers focus on core purchases.
Singapore Airlines said it was in talks with interested parties to sell its 49 percent stake in British carrier Virgin Atlantic, with sources saying that Delta Air Lines was among the potential suitors. Delta shares fell 2.1 percent to $9.79.