Updates at 4:14 p.m. ET (2014 GMT

By Chris Prentice and Samuel Indyk

NEW YORK/LONDON, Aug 1 (Reuters) -Global equities dropped on Thursday, with Wall Street's major indexes selling off as U.S. data sparked economic worries about andfinancial stocks in Europe saw their biggest one-day rout since March 2023.

Treasury yields plunged following the weak data, with the U.S. two-year to 10-year note yields dropping to six-month lows, below 4%.

Oil futures finished loweras global supply seemed largely unaffected by worries of a broadening Middle East crisis. O/R

The Federal Reserve held interest rates steady on Wednesday but opened the door to a cut in September. The Bank of England stole a march on the U.S. central bank on Thursday by lowering borrowing costs by a quarter-point in a narrow 5-4 vote.

The U.S. Institute for Supply Management's (ISM) manufacturing PMI dropped to its lowest since November, below a key level that indicates contraction in a sector that accounts for more than 10% of the economy.

The number of Americans filing new applications for unemployment benefits increased to an 11-month high last week, suggesting some softening in the labor market, although seasonal factors also played a role,other data showed.

"Today's selloff isn't about earnings. It's about whether the Fed sees what the data is saying," said Quincy Krosby, chief global strategist for LPL Financial in Charlotte, North Carolina.

"If tomorrow's payroll report sees the unemployment rate rising despite an increase in the participation rate, the Fed is going to have a lot of explaining to do," said Quincy Krosby, Chief Global Strategist for LPL Financial in Charlotte, North Carolina.

On Wall Street, the Dow Jones Industrial Average .DJI fell 494.82 points, or 1.21%, to 40,347.97, the S&P 500 .SPX lost 75.62 points, or 1.37%, to 5,446.68 and the Nasdaq Composite .IXIC lost 405.25 points, or 2.30%, to 17,194.15

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 11.11 points, or 1.36%, to 803.05.

Europe's STOXX 600 .STOXX index closed more than 1% lower with the banking sector .SX7P seeing its largest one-day decline since March 2023.

"The fact that some heavyweights are cutting guidance does not bode well going forward and might well explain why European markets are underperforming," said Stephane Ekolo, equity strategist at TFS Derivatives.

"Disappointing set of results, slowing growth for industrials, Chinese consumers no longer there to rescue demand and a possible resurgence of inflation. You have a not so pleasant cocktail."

Britain's FTSE 100 .FTSE bucked the trend.

"If you look at the headlines that (BoE Governor Andrew) Bailey produced: caution on cutting too quickly or by too much, it implies to me that they're looking at a steady quarterly pace of reductions," said Colin Asher, economist at Mizuho.

"I would say that makes a cut in the next meeting in September unlikely. The start of lower interest rates is underway, but reasonably gradually."

Emerging market stocks .MSCIEF held onto gains, or 0.10%, to 1,085.84. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS closed 0.54% higher at 568.59.

Japan's Nikkei .N225, however, tumbled 2.5% as a sharp jump in the yen clouded the outlook for exporters .T.

The Japanese yen JPY=EBS rallied against the dollar to its strongest level since March, a day after the Bank of Japan raised interest rates for the second time in 17 years and signalled more tightening to come.

FED SIGNALS SEPTEMBER CUT

Eyes remained on the U.S. monetary policy outlook after Fed Chair Jerome Powell said policymakers had a "real discussion" about cutting at the July meeting.

The central bank also said the risks to employment were now on a par with those of rising prices.

"The statement was notable in that they removed the tightening bias and replaced it with a more neutral bias," said Jan von Gerich, chief analyst at Nordea.

"It's early but the fact we haven't really seen the rally continue suggests that markets may be trying to catch some breath before tomorrow's (U.S.) payrolls report."

The yield on benchmark U.S. 10-year notes US10YT=RR fell 13.3 basis points to 3.972%, from 4.105% late on Wednesday. Yields move inversely to prices.

After falling 0.4% on Wednesday, the dollar index =USD which measures the greenback against a basket of currencies including the yen and the euro, gained 0.34% at 104.40

The euro EUR= fell 0.35% at $1.0787.

In commodity markets, global benchmark Brent crude futures LCOc1 closed $1.32, or 1.6%, lower at $79.52 a barrel, while U.S. West Texas Intermediate crude CLc1 fell $1.60, or 2.1%, to $76.31.O/R

Spot gold XAU= lost 0.21% to $2,442.90 an ounce, after touching its highest since July 18.

U.S. gold futures GCcv1 settled 0.3% higher at $2,480.8. SGOL/

Reporting by Chris Prentice, Samuel Indyk, Stella Qiu and Ankur Banerjee; Editing by Chizu Nomiyama and Bernadette Baum, Kirsten Donovan and Cynthia Osterman

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