*

Weekly jobless claims at 225,000

*

US service sector activity accelerates to 1-1/2-year high

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East, Gulf coast workers' strike enters third day

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Indexes: Dow down 0.44%, S&P 500 down 0.17%, Nasdaq down

0.04%

(Updates to 4:15 p.m. ET/2015 GMT)

By Caroline Valetkevitch

NEW YORK, Oct 3 (Reuters) - U.S. stocks finished lower

on Thursday ahead of Friday's monthly U.S. payrolls report and

as investors kept a watchful eye on the growing conflict in the

Middle East.

Data on Thursday showed that the number of Americans filing

new applications for unemployment benefits rose marginally last

week, while Hurricane Helene and strikes at ports could distort

the labor market picture in the near term.

Friday's jobs report for September is considered key for

the outlook for U.S. interest rates. Economists polled by

Reuters expect 140,000 job additions, while the unemployment

rate is anticipated to stay steady at 4.2%.

Investors are eager for more data on the labor market

after the Federal Reserve last month cut its benchmark interest

rate by an unusually large 50 basis points, the first reduction

in borrowing costs since 2020.

"It looks like investors are cautious ahead of the jobs

report tomorrow," said Adam Sarhan, chief executive of 50 Park

Investments in New York.

Also, he said, "it's normal to see some profit-taking after

a big rally like we've had over the last two, three weeks."

The Cboe Volatility index, Wall Street's fear

gauge, rose to 20.49, its highest closing level since Sept. 6.

Israel's military told residents of more than 20 towns

in south Lebanon to evacuate their homes immediately on

Thursday.

The Dow Jones Industrial Average fell 184.93 points,

or 0.44%, to 42,011.59, the S&P 500 lost 9.58 points, or

0.17%, to 5,699.96 and the Nasdaq Composite eased 6.65

points, or 0.04%, to 17,918.48.

The S&P 500 remains up 19.5% for the year so far.

Traders are now pricing in a 35% probability of a 50 basis

point cut next month, down from 49% a week ago, the CME Group's

FedWatch Tool shows.

The benchmark index briefly turned positive after the

Institute for Supply Management survey showed U.S. service

sector activity jumped to a one-and-a-half-year high in

September, further evidence that the economy stayed robust in

the third quarter.

"Once again, services is doing the heavy lifting keeping

this economy humming along," said Brian Jacobsen, chief

economist at Annex Wealth Management.

But also, he said, "oil prices have moved higher and the

port strike can really throw a monkey wrench in things."

Energy shares gained along with a surge in oil prices as

concerns mount over a widening regional conflict in the Middle

East that could pose a threat to global crude flows. The S&P 500

energy index rose 1.6%.

A workers' strike on the East and Gulf coasts entered its

third day. Morgan Stanley economists said a prolonged stoppage

could raise consumer prices, with food prices likely to react

first.

Constellation Brands ( STZ ) shares fell 4.7% after the beer

maker maintained its sales and profit forecast for fiscal year

2025.

Results from some of the big U.S. banks are expected to

unofficially kick off third-quarter S&P 500 earnings at the end

of next week.

Declining issues outnumbered advancing ones on the NYSE by a

2.13-to-1 ratio; on Nasdaq, a 1.99-to-1 ratio favored decliners.

The S&P 500 posted 25 new 52-week highs and 2 new lows;

the Nasdaq Composite recorded 63 new highs and 114 new lows.

Volume on U.S. exchanges was 11.01 billion shares,

compared with the 12.08 billion average for the full session

over the last 20 trading days.

(Additional reporting by Johann M Cherian and Purvi Agarwal in

Bengaluru and Chuck Mikolajczak in New York; Editing by Pooja

Desai)