* Caterpillar profit stronger than expected; shares rally
* U.S. new home sales fall for second straight month in Dec.
* Dow down 0.3 pct, S&P 500 off 0.5 pct, Nasdaq down 1.1 pct
By Caroline Valetkevitch
NEW YORK, Jan 27 (Reuters) - U.S. stocks extended recent losses on Monday, with the S&P 500 falling for a third straight session as concern grew about the Federal Reserve's plans for withdrawing stimulus.
The losses, which picked up late in the session after the S&P 500 briefly traded in positive territory, followed a steep selloff late last week tied to emerging market concerns. The slide gave the S&P 500 its worst weekly percentage loss since June 2012.
Limiting losses in the Dow and S&P 500, however, was Caterpillar. The stock jumped 5.9 percent to $91.29 after the maker of mining and construction equipment reported a stronger-than-expected quarterly profit.
The technology sector led the day's decline, with the S&P 500 technology sector index falling 1 percent and the Nasdaq underperforming both the Dow and S&P 500. Google , off 2 percent at $1,101.23, and Microsoft, down 2.1 percent at $36.03, were among the day's biggest drags.
"There's still a lot of nervous money hanging around," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
"The Fed is meeting this week, and the consensus is they're going to proceed with the taper."
The Fed's two-day policy meeting begins on Tuesday. Many market participants are bracing for the market to sell if the Fed decides to keep withdrawing stimulus. In December, the U.S. central bank announced plans to begin scaling back its massive bond-buying program.
The Dow Jones industrial average fell 41.23 points or 0.26 percent, to end at 15,837.88. For the Dow, Monday marked a fifth session of losses.
The S&P 500 dropped 8.73 points or 0.49 percent, to finish at 1,781.56. The Nasdaq Composite slid 44.56 points or 1.08 percent, to close at 4,083.61.
Last week's heavy selling raised some concerns that the market may be in for a major correction, especially since the S&P 500 closed on Friday below its 50-day moving average for the first time since Oct. 9.
On Monday, the Nasdaq ended below its 50-day moving average.
Others did not consider the recent selling as cause for concern.
"The slowdown in emerging markets isn't prevalent enough to derail the deepening economic recovery that we're seeing across developed markets," said Steven Rees, U.S. head of equity strategy at J.P. Morgan Private Bank in New York.
"We're not expecting a major correction in the market this year."
Another dampener on Monday's sentiment was data showing sales of new U.S. single-family homes fell more than expected in December, even though lean inventories and steady price gains suggested sufficient strength in the housing market.
But the gains in Caterpillar underlined an improving trend in fourth-quarter profit numbers. Caterpillar's cost cuts and an uptick in demand for building equipment offset continued weak sales to the mining industry.
Volume was above average for the month. About 8 billion shares changed hands on U.S. exchanges, compared with the average of 6.8 billion so far this month, according to data from BATS Global Markets.
Decliners outnumbered advancers on the New York Stock Exchange by about 3 to 1. On the Nasdaq, more than three stocks fell for every one that rose.