US stocks dropped yesterday, led by retailers and banks, as the announcement from electronics retailer Circuit City Stores Inc that its sales growth has slowed sharply undermined confidence in the sector.

While signs of a slowdown in the economy are helping sentiment because it suggests the Federal Reserve is less likely to jack up interest rates, they do mean that companies who rely on consumer spending, such as retailers, may take a short-term hit.

Investors also stepped lightly ahead of economic data due later this week that may offer clues on the Fed's next move, traders said.

Based on early and unofficial closing data, the blue chip Dow Jones industrial average dropped 79.73 points, or 0.74 per cent, to 10,735.57, with retailers among the main losers.

The technology-dominated Nasdaq composite index dropped 65.37 points, or 1.71 per cent, to 3,756.39.

The Standard & Poor's 500 index fell 9.79 points, or 0.67 per cent, to 1,457.84.