(Updates to U.S. markets close)
* Dow, S&P 500 and Nasdaq all down on Russia tensions
* Dollar off highs, euro down; U.S. bond yields rise after 5-year auction
* Emerging market stocks rise, gold near 5-week low
By Barani Krishnan
NEW YORK, March 26 (Reuters) - U.S. stocks fell on Wednesday, led by fresh selling in technology shares after the West agreed to prepare possibly tougher sanctions to punish Russia over Ukraine, while the dollar pared gains made on strong U.S. economic data.
U.S. Treasury debt prices moved higher after the government sold $35 billion in new five-year notes amid strong demand from fund managers and other investors, while gold remained near 5-week lows on a lack of physical bullion buying.
After a summit with top EU officials, President Barack Obama said the United States and the European Union agreed to prepare possible tougher penalties for Russia, including the energy sector, to make Europe less dependent on Russian gas.
"This could be a non-event if the market wasn't at the level that it is now. Because we are still near record highs, this kind of geopolitical news can make investors more nervous," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
The Dow Jones industrial average ended down 98.89 points, or 0.60 percent, at 16,268.99. The Standard & Poor's 500 Index fell 13.06 points, or 0.70 percent, to 1,852.56. The technology-heavy Nasdaq Composite Index lost 60.69 points, or 1.43 percent, to 4,173.58, a bottom not seen in six weeks.
Stocks in the S&P healthcare and telecom sectors, which led a morning rally, sharply pared gains.
Among technology shares, Facebook closed down 7 percent at $60.38. The Nasdaq biotech index slid 2 percent and was down almost 5 percent for the week so far for its worst week since mid-October.
"From a fundamental standpoint, people are not sure if growth can be sustained with many continuing headwinds, i.e., the Russia-Ukraine rhetoric; off-again, on-again concerns about China, and the approaching quarter-end profit-taking in biotech and momentum stocks," said Adam Sarhan of Sarhan Capital in New York.
While China is a concern, some investors are also counting on Beijing taking steps to bolster its economy. There is a growing bet that China will launch stimulus measures as economists expect the world's No. 2 economy to miss the government growth target of 7.5 percent this year.
"Investors are betting on stimulus because Chinese authorities have done everything they could to achieve the target in the past," said Sho Aoyama, senior market analyst at Mizuho Securities.
European stocks ended in positive territory for a second day. London's FTSE finished flat while Germany's DAX rose 1.2 percent and France's CAC gained 0.9 percent.
The MSCI emerging equities index climbed 1 percent, its biggest gain in almost three weeks, helped by a recovery in Russian stocks and in Poland and Hungary .
In the latest snapshot of the U.S. economy, orders for durable goods rose more than expected in February, ending two straight months of declines. Financial data firm Markit's preliminary composite Purchasing Managers Index showed private-sector economic activity accelerated in March at a faster clip than in February as the services sector picked up.
The stronger U.S. data initially bolstered the dollar index while the euro fell European Central Bank officials ramped up efforts to talk down the currency.
ECB governing council member and Bundesbank chief Jens Weidmann said negative interest rates were an option to temper euro strength.
The euro traded lower for a second straight day at $1.3784 , not far from the three-week trough of $1.3749 hit on Tuesday. It was also lower against the yen at 140.61.
The dollar index edged up just 0.1 percent, off an earlier gain of as much as 0.3 percent.
U.S. Treasuries yields fell slightly after the auction. The benchmark 10-year U.S. Treasury note was up 12/32, its yield at 2.6901 percent.
Two- and five-year notes have been the worst performers since Federal Reserve Chair Janet Yellen said last Wednesday that the U.S. central bank could raise interest rates six months after its current bond-buying program ends, suggesting a potential rate hike as early as the spring of 2015.
In precious metals trading, spot gold was at $1,303.60 an ounce after plumbing a 5-week bottom of $1,300.09. (Additional reporting by Alistair Smout in London and Hideyuki Sano in Tokyo; Editing by Larry King, Dan Grebler and Jan Paschal)