(Refiles to correct typo in name of NYSE Arca Airline Index in paragraph five)
* Initial claims fall, housing starts short of estimates
* Microsoft to cut up to 18,000 jobs, 14 percent of workforce
* Indexes off: Dow 0.3 pct, S&P 0.48 pct, Nasdaq 0.66 pct
NEW YORK, July 17 (Reuters) - U.S. stocks dropped on Thursday to hit session lows on news that a Malaysian passenger jetliner had been downed in Ukraine, fresh on the heels of new U.S. and European Union sanctions on Russia.
A Malaysian airplane failed to enter Russian airspace when expected on Thursday and was found burning on the ground in eastern Ukraine, an aviation source told Reuters.
"Clearly there is a lot of speculation, there are even videos surfacing on YouTube and the market is quite sensitive to things it can only verify by Twitter," said Joseph Greco, managing director at Meridian Equity Partners in New York.
"President Obama had some words about sanctions and as you know, that is going to be a bit of an issue."
The iShares China Large Cap ETF lost 0.8 percent. The NYSE Arca airline index was down 1.6 percent.
The U.S. sanctions announced late Wednesday hit some of Russia's biggest firms while the EU sanctions were aimed at Russian companies that help destabilize Ukraine and will block new loans to Russia through two multilateral lenders. The Market Vectors Russia ETF dropped 5.5 percent.
Equities had been holding near the unchanged mark earlier in the session, largely on the back of solid earnings from companies such as Morgan Stanley, which was down 0.1 percent at $32.46, and UnitedHealth, up 3.4 percent at $86.62.
Microsoft shares rose 2.9 percent to $45.34 after the company said it would cut up to 18,000 jobs, or about 14 percent of its workforce, resulting in pre-tax charges of $1.1 billion to $1.6 billion over the next four quarters.
The Dow Jones industrial average fell 51.27 points or 0.3 percent, to 17,086.93, the S&P 500 lost 9.51 points or 0.48 percent, to 1,972.06 and the Nasdaq Composite dropped 28.99 points or 0.66 percent, to 4,396.98.
Economic data on manufacturing and the labor market indicated the economy was gaining traction, although the housing market remains weak. The PHLX housing index lost 1.5 percent.
S&P 500 companies' profits are expected to grow 4.9 percent in the second quarter, according to Thomson Reuters data, down from the 8.4 percent growth forecast at the start of April. Revenue is seen up 3 percent.
Thomson Reuters data also shows that of the 66 companies in the S&P 500 that have reported earnings through Thursday morning, 68.2 percent have topped Wall Street expectations, roughly in-line with the 67 percent rate for the past four quarters and above the 63 percent rate since 1994. (Editing by Bernadette Baum and Nick Zieminski)