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* U.S. services sector contracts for first time since 2016
* Technology, oil, bank stocks lead declines
* Wall St fear gauge hits highest in nearly three weeks
* Indexes down: Dow 0.64%, S&P 0.86%, Nasdaq 1.40% (Updates to early afternoon)
By Sruthi Shankar
Feb 21 (Reuters) - U.S. stock indexes fell on Friday after data showed U.S. business activity stalled in February, while a spike in new coronavirus cases in China and elsewhere sent investors scrambling for safer assets such as gold and government bonds.
The IHS Markit's Purchasing Managers' index of services sector activity dropped to its lowest level since October 2013, signalling a contraction for the first time since 2016. The manufacturing sector also clocked its lowest reading since August.
Declines on Friday were led by heavyweights Microsoft Corp , Amazon.com Inc and Apple Inc for a second straight day.
The S&P technology index dropped 1.9%. Chipmakers, heavily reliant on China for their revenue, also took a beating, with the Philadelphia Semiconductor index falling 2.5%.
"We are in an unknown situation and, when valuations are expensive, any minor hint of news that is negative makes investors run for the exits," said Phil Blancato, chief executive officer of Ladenburg Thalmann Asset Management in New York.
Hopes of monetary easing by major central banks had propelled the benchmark S&P 500 and the tech-heavy Nasdaq to all-time highs on Wednesday, but the indexes are on course for their first weekly decline in three weeks as the virus appears harder to contain.
The S&P 500 was trading 1.4% below its all-time high.
"I think Apple's announcement last week is the beginning of the hard news flow," said Hugh Anderson, managing director at HighTower Advisors in Las Vegas, Nevada, referring to the iPhone maker's sales warning due to the impact of the virus outbreak.
"Not only are you seeing a break in the supply chain but also you're seeing a break in the demand for products, which is a fundamental challenge to an already moderate global growth."
China reported a jump in new cases on Friday, while South Korea became the latest hot spot with 100 new cases and more than 80 people tested positive for the virus in Japan.
Wall Street's fear gauge, the CBOE volatility index, hit its highest level in nearly three weeks.
The risk-off sentiment drove up gold and bond prices, while falling Treasury yields hit shares of lenders, with the S&P banks index down 1.2%.
A slide in oil prices knocked 1% off the S&P energy index .
At 1:03 p.m. ET, the Dow Jones Industrial Average was down 0.64% at 29,031.99. The S&P 500 fell 0.86% to 3,344.37 and the Nasdaq Composite dropped 1.40% to 9,614.53.
Among other stocks, Dropbox Inc jumped 21.2% after it raised its outlook for operating margin, and Deere & Co rose 8.2% after an unexpected rise in first-quarter profit.
Sprint Corp climbed 6.1% as it announced new merger terms with T-Mobile US that would reduce the stake of major Sprint shareholder SoftBank. T-Mobile shares dipped 0.9%.
Declining issues outnumbered advancers for a 1.82-to-1 ratio on the NYSE and a 1.94-to-1 ratio on the Nasdaq.
The S&P index recorded 26 new 52-week highs and eight new lows, while the Nasdaq recorded 67 new highs and 49 new lows. (Reporting by Sruthi Shankar and Manas Mishra in Bengaluru; Editing by Shinjini Ganguli and Anil D'Silva)