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Indexes down: Dow 0.12%, S&P 500 0.40%, Nasdaq 0.38%

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Initial claims for state unemployment benefits drop

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Intel ( INTC ) rises on report chipmaker seeking investment from

Apple ( AAPL )

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CarMax ( KMX ) falls to lowest in over five years

(Updates with late-morning trading)

By Niket Nishant and Sukriti Gupta

Sept 25 (Reuters) - Wall Street's main indexes slumped

to their lowest in a week on Thursday, as fresh economic data

tempered optimism around further interest rate cuts, indicating

a sharp shift in sentiment across a market betting on aggressive

easing.

A split among Federal Reserve policymakers, with some

pushing for aggressive cuts to safeguard the labor market and

others advocating caution, also injected a dose of uncertainty.

The pullback underscores the market's sensitivity to even

modest shifts in economic indicators, particularly after a

September rally that defied the month's typical seasonal

weakness.

Initial claims for state unemployment benefits dropped

14,000 to a seasonally adjusted 218,000 for the week ended

September 20, data from the Labor Department showed. Economists

polled by Reuters forecast 235,000 claims for the latest week.

"There may be cracks in the labor market, but if today's

data is any indication, they haven't widened recently," said

Chris Larkin, managing director, trading and investing, at

brokerage firm E*Trade.

Investors scaled back expectations of a 25-basis-point rate

cut in the Fed's October meeting to 83.4%, from about 92% on

Wednesday, according to the CME FedWatch Tool.

The central bank had lowered rates by 25 bps last week in

its first cut since December, and had signaled more reductions

ahead.

But Chicago Fed President Austan Goolsbee said on Thursday

he was uneasy with cutting rates too quickly, flagging risks

about inflation flaring up.

At 11:37 a.m. ET, the Dow Jones Industrial Average

fell 54.57 points, or 0.12%, to 46,066.71. The S&P 500

lost 26.31 points, or 0.40%, to 6,611.66, while the Nasdaq

Composite was down 85.53 points, or 0.38%, at 22,414.29.

IBM ( IBM ) shares rose 5.6% after the company unveiled a

partnership with HSBC ( HSBC ), capping losses on the Dow.

The S&P 500 technology stocks were flat, while the

broader semiconductor index dipped 0.3%.

CarMax ( KMX ) slid to its lowest in more than five years,

becoming the biggest loser on the S&P 500, after the used-car

retailer reported lower second-quarter profit. Its shares were

last down 20%.

Intel ( INTC ) rose 6.7%, a day after Bloomberg News

reported that the chipmaker has approached Apple ( AAPL ) about

securing an investment.

Brokerage firm Seaport Research Partners upgraded Intel's ( INTC )

stock to "neutral" from "sell".

Investors are now focused on Friday's release of the

Personal Consumption Expenditures index, the Fed's preferred

inflation measure, which could shape expectations for the path

of interest rates.

"I think it's going to fall within the range of normalcy. I

think we see rates come down another 100 or so basis points over

the next 18 months and we get to a very sweet spot in the

economy," said Frank Sorrentino, CEO of ConnectOne Bank

.

A potential government shutdown in Washington, where budget

negotiations have so far failed to yield an agreement, has also

aggravated the worries.

Declining issues outnumbered advancers by a 2.9-to-1 ratio

on the NYSE and by a 2.8-to-1 ratio on the Nasdaq.

The S&P 500 posted 11 new 52-week highs and 15 new lows,

while the Nasdaq Composite recorded 41 new highs and 69 new

lows.