* Payroll gains miss estimates, but unemployment rate down
* Bank shares fall after court ruling
* Dow off 0.4 pct, S&P off 0.4 pct, Nasdaq off 0.5 pct
* For up-to-the-minute market news see [STXNEWS/US] (Updates with banks falling after court ruling on foreclosures)
By Chuck Mikolajczak
NEW YORK, Jan 7 (Reuters) - U.S. stocks fell on Friday as bank shares lost ground after a Massachusetts court ruling against Wells Fargo and US Bancorp in which two home foreclosures were voided.
The Supreme Judicial Court, the state's highest court, said the banks that tried to take title to the homes failed to show they held the mortgages at the time of foreclosure, raising the possibility other foreclosure sales by banks could be invalidated. For details, see [ID:nN07198844]
"Financials have really been a leader in the market in recent weeks -- this could close that sector out," said Nick Kalivas, senior equity index analyst at MF Global in Chicago.
Stocks had been struggling around break-even earlier after a mixed U.S. employment report for December in which the economy created fewer jobs than expected but the unemployment rate fell.
Wells Fargo & Co (WFC.N) shares fell 2.8 percent to $31.25 and US Bancorp (USB.N) shed 0.6 percent to $26.14. The KBW Bank index .BKX lost 1.4 percent.
The Dow Jones industrial average .DJI dropped 41.89 points, or 0.36 percent, to 11,655.42. The Standard & Poor's 500 Index .SPX dropped 5.53 points, or 0.43 percent, to 1,268.32. The Nasdaq Composite Index .IXIC dropped 12.24 points, or 0.45 percent, to 2,697.65.
Investors initially treaded lightly after the mixed U.S. employment report in which non-farm payrolls rose 103,000. [ID:nN06134458]
"It's probably not as good a number as the bulls wanted to see, but by no means is it a bad number," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
Labor Department revisions also showed 70,000 more jobs added than previously reported in October and November.
For the jobs report, economists had revised their expectations for non-farm payrolls higher to 175,00 after Wednesday's surprisingly strong ADP private-sector employment figures, which were triple forecasts.
"If we hadn't had that ADP number, this would have been seen more positively," said Massocca.
The S&P 500 has posted gains for the day on each of the last four monthly payrolls reports, according to a data analysis by New York-based Instinet. Only one of the four gains was more than 1 percent, while the other three were less than 0.65 percent.
On Capitol Hill, Federal Reserve Chairman Ben Bernanke sounded cautiously more upbeat than he had in recent public remarks, citing improvements in consumer spending and a drop in claims for jobless benefits as hopeful signs for the recovery. [ID:nN06147394] (Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)