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US STOCKS-Dow drops 1% after hawkish Bullard remarks

·3 min read

(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window.)

* CAI jumps on $1 bln takeover deal by Mitsubishi

* Bank stocks extend declines

* CBOE volatility index jumps to 20 points

* Indexes down: Dow 1.14%, S&P 0.94%, Nasdaq 0.79% (Adds comment, details; updates prices)

By Shashank Nayar and Medha Singh

June 18 (Reuters) - The Dow fell 1% on Friday after Federal Reserve official James Bullard said inflation was stronger than anticipated and it would take the central bank several meetings to figure out how to pare back stimulus.

The blue-chip Dow and the benchmark S&P 500 were set for their worst day in a month after Bullard, president of the St. Louis Federal Reserve, said he was among the seven officials who saw rate increases beginning next year to contain inflation.

The CBOE volatility index, Wall Street's fear gauge, spiked to 20.60 points, its highest level since May 21 following his comments.

"It may indicate that inflation is becoming a concern for the Fed," said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

"Second, it suggests that tightening could crimp the growth of the economy and the earnings of the S&P 500 sooner than investors thought."

Wall Street's main indexes were jolted earlier this week after the Fed unexpectedly signaled it could begin tapering its massive stimulus sooner than expected, setting the benchmark S&P 500 on course to snap a three-week winning streak.

Surprisingly weaker-than-expected weekly jobless claims on Thursday prompted a move out of economy-linked financials , energy and materials stocks.

Rate-sensitive bank stocks shed 1.8% as U.S. yield curve flattened.

"The surprising drop in longer-term yields this week is showing the market is potentially worried about the strength of the recovery in the second half of this year," said Ryan Detrick, senior market strategist for LPL Financial.

At 11:47 a.m. ET, the Dow Jones Industrial Average was down 386.62 points, or 1.14%, at 33,436.83, the S&P 500 was down 39.84 points, or 0.94%, at 4,182.02. The Nasdaq Composite was down 111.22 points, or 0.79%, at 14,050.13.

Friday is also "quadruple witching day," the quarterly simultaneous expiration of U.S. options and futures contracts which bring about increased trading volume at the market close.

It is the largest options expiration in history, noted Randy Frederick, vice president of trading and derivatives for Charles Schwab.

Transportation finance and logistics company CAI International Inc surged 46.5% after it agreed to a $1.1 billion takeover by Mitsubishi HC Capital Inc.

Declining issues outnumbered advancers for a 2.88-to-1 ratio on the NYSE and for a 2.63-to-1 ratio on the Nasdaq.

The S&P index recorded 12 new 52-week highs and one new low, while the Nasdaq recorded 32 new highs and 38 new lows. (Reporting by Sagarika Jaisinghani, Medha Singh and Shashank Nayar in Bengaluru; Editing by Maju Samuel)