US STOCKS-Indexes slump more than 3 pct on euro zone fears

* Euro-zone turmoil feeds fear of market correction

* Sears falls after results, but Williams-Sonoma rises

* U.S. weekly initial jobless claims disappoint

* Dow off 3.2 pct, S&P down 3.6 pct, Nasdaq off 4 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates to afternoon trading)

By Ryan Vlastelica

NEW YORK, May 20 (Reuters) - U.S. stocks dropped on Thursday, with all major indexes sliding more than 3 percent on growing fears that the euro zone’s handling of its sovereign debt crisis could jeopardize the global economic recovery.

The S&P 500 is now down more than 10 percent from its April high, signifying a correction. The index is also below its 200-day moving average.

“Europe is causing a correction that calls the whole recovery into question,” said Andy Fitzpatrick, director of investments at Hinsdale Associates in Hinsdale, Illinois. “It’s not outside the realm of possibility that we could drop another 5 percent from here.”

Germany's unilateral decision on Tuesday to ban naked short-selling has triggered worries about additional regulation and hurt the euro EUR=, which was down 0.5 percent versus the dollar. For details, see [ID:nTOPNOW2]

The Dow Jones industrial average .DJI was down 332.60 points, or 3.18 percent, at 10,111.77. The Standard & Poor's 500 Index .SPX was down 40.07 points, or 3.59 percent, at 1,074.98. The Nasdaq Composite Index .IXIC was down 91.59 points, or 3.99 percent, at 2,206.78.

May individual equity options and some options on stock indexes stop trading at Friday’s close and expire on Saturday, which may increase volatility.

The Chicago Board Options Exchange Volatility index .VIX, often referred to as Wall Street's fear gauge, surged 31 percent to its highest intraday level in more than a year.

Banks and commodity-related stocks were among the hardest hit, with the KBW Bank index .BKX losing 4.6 percent. The S&P Energy index .GSPE fell 4.3 percent while June crude futures plummeted 6 percent to $65.43 a barrel.

“I look at oil as a proxy for the economy, and oil continues to weaken,” Fitzpatrick said. “If the recovery really is on hold, demand will really decrease and the price will continue to drop.”

Sears Holdings Corp SHLD.O tumbled 8.8 percent to $90.80 after the company said first-quarter profit slipped 38 percent, hit by weaker margins and slightly higher costs. [ID:nSGE64J0FR]

One rare stock gainer was retail store chain Williams-Sonoma Inc WSM.N, which rose 2.7 percent to $29.25 after reporting an adjusted first-quarter profit that easily beat expectations. [ID:nN20118101].

Labor Department data on Thursday showed the number of U.S. workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April. [ID:nN19248916]

The Conference Board said its index of leading economic indicators slipped last month, marking its first drop since March 2009. Factory activity in the U.S. mid-Atlantic region accelerated less than expected in May, according to a survey by the Philadelphia Federal Reserve Bank. [ID:nN20130359] [ID:nN20130439]. (Editing by Kenneth Barry)