* Soft demand at Italy debt auction sparks concern
* Cliffs Natural shares plummet after downgrade
* U.S. February pending home sales index fell 0.4 pct
* Dow off 0.25 pct; S&P 500 off 0.19 pct; Nasdaq off 0.08 pct
NEW YORK, March 27 (Reuters) - U.S. stocks declined on Wednesday as tepid demand at an Italian debt auction stoked investor concerns about the financial stability of the euro zone.
A stalemate over the formation of a new government in Italy and fiscal upheaval in Cyprus were reflected in a rise in Italian bond yields, with the cost of five-year debt at its highest level since October.
Still, equities pared earlier losses after a Greek newspaper reported that Cyprus plans to ban cashing checks and curb the amount of cash that can be taken out of the country under a series of measures to avoid a run on its crippled banks.
The modest decline put the S&P 500 about 5 points away from its all-time closing high of 1,565.15. The index has been unable to break through that milestone in recent sessions, including Tuesday's gains that left the benchmark within 2 points of the historic level set on Oct. 9, 2007.
"Clearly we are giving back some of (Tuesday's) gains as we once again have some of the fears creeping up from Europe and Italy," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.
"But again it seems like we continue to bounce right up against this new S&P high and can't quite get through."
The PHLX Europe sector index declined 1.3 percent.
Cypriot banks are due to reopen on Thursday. The chief executive of the Bank of Cyprus, the country's largest commercial lender, said he had been dismissed by the Central Bank.
The Dow Jones industrial average dropped 36.33 points, or 0.25 percent, to 14,523.32. The Standard & Poor's 500 Index shed 2.98 points, or 0.19 percent, to 1,560.79. The Nasdaq Composite Index dipped 2.60 points, or 0.08 percent, to 3,249.89.
As attempts to break past the S&P 500 record closing high fall short, the possibility of a sharper pullback - which many analysts have been anticipating - grows.
At the same time, buyers continue to move in on any signs of weakness, which has enabled the benchmark index to quickly erase declines and trade within 10 points of its all-time closing peak for the past 13 sessions.
Cliffs Natural Resources Inc shares lost 15.3 percent to $18.15 and was the S&P 500's worst performer after Morgan Stanley downgraded the miner's stock and Credit Suisse slashed its price target, citing difficulties from a surplus of iron ore pellets in the Great Lakes region.
Data showed contracts to buy previously owned U.S. homes fell in February, held back by a shortage of properties, but there was little to suggest that the housing market recovery was stalling. The National Association of Realtors said its U.S. Pending Home Sales Index slipped 0.4 percent in February. Economists had expected a decline of 0.2 percent.