* Malaysian airliner downed in Ukraine war zone
* Israeli PM orders ground offensive in Gaza -official statement
* Morgan Stanley profit more than doubles, beats estimates
* Dow off 0.9 pct; S&P 500 down 1.2 pct; Nasdaq off 1.4 pct (Updates close with IBM, Google after the bell)
By Angela Moon
NEW YORK, July 17 (Reuters) - U.S. stocks sank on Thursday, with the S&P 500 posting its biggest one-day percentage drop since April 10 on news that a Malaysian Airlines passenger jet crashed near the Ukraine-Russia border.
Investors sold stocks in a move to avoid risk and poured money into safe-haven investments like gold and U.S. government bonds as the crash stoked concerns that the conflict in Ukraine might widen after U.S. sanctions against Russia were announced late Wednesday.
The United States said the Malaysian Airlines Boeing 777 was "blown out of the sky," probably by a ground-launched missile. The jet had 295 people aboard. The crash followed an increase in tensions between Ukraine and Russia that has resulted in clashes along the border, including the targeting of military aircraft.
Further pressuring the market, Israeli Prime Minister Benjamin Netanyahu on Thursday instructed the military to begin a ground offensive in Gaza, an official statement from his office said. Reuters witnesses and Gaza residents reported heavy artillery and naval shelling and helicopter fire along the Gaza border.
"I can't remember a time when there were more geopolitical skirmishes going on, all of which are creating uncertainty," said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston.
"We were already ripe for a correction, but I'm putting today into the 'noise' category for now, since we need to see whether there is follow-through to this move."
The Dow Jones industrial average fell 161.39 points or 0.94 percent, to end at 16,976.81. The S&P 500 lost 23.45 points or 1.18 percent, to 1,958.12. The Nasdaq Composite dropped 62.52 points or 1.41 percent, to 4,363.45.
The CBOE Volatility Index, Wall Street's fear gauge, surged 32.2 percent to 14.54, its highest level since April 15.
After the closing bell, shares of Google Inc rose 1.6 percent. The stock's jump followed news that Nikesh Arora, the Internet search company's chief business officer - one of Chief Executive Officer Larry Page's key lieutenants and the company's main liaison to Wall Street - is leaving, the latest high-ranking executive to depart. Arora's surprise departure was announced as Google reported results that beat investors' expectations.
Shares of International Business Machines Corp fell 1.3 percent in extended-hours trading after the company reported higher-than-expected quarterly revenue and earnings per share. The improvement in IBM's results occurred as the company continued to shift to higher-end businesses such as big data, cloud computing, and security and mobile services.
During the regular session, the NYSE Arca airline index fell 2.6 percent. Shares of most major U.S. carriers slid, with American Airlines Group Inc down 4.1 percent at $41.70 and United Continental Holdings Inc down 3.5 percent at $43.35.
The Market Vectors Russia exchange-traded fund fell 7.2 percent on consolidated volume of 7.4 million shares.
The major U.S. stock indexes had opened slightly lower. Equities held near the unchanged mark and the Dow briefly turned positive, hitting an intraday record high at 17,151.56 in early morning trading after solid earnings from companies such as Morgan Stanley and UnitedHealth. Morgan Stanley's stock slipped 0.6 percent to end at $32.30. Shares of UnitedHealth Group Inc rose 1.6 percent to $85.11.
By late morning, though, stocks skidded to session lows after news of the Malaysian plane crash.
Going against the day's sharp downtrend was Microsoft Corp , which rose 1 percent to $44.53. The stock rallied after Microsoft 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.
About 6.63 billion shares traded on U.S. exchanges, above the 5.48 billion average for the month to date, according to data from BATS Global Markets. (Reporting by Angela Moon; Editing by Jan Paschal)