US STOCKS-Wall St slides as Fed minutes spark concern
* S&P 500 posts worst day in over 3 months
* VIX fear index jumps 19.3 pct, biggest gain since November 2011
* Commodity market weakness pressures energy stocks
* Housing shares drop after Toll Bros results
* Dow off 0.8 pct, S&P 500 off 1.2 pct, Nasdaq off 1.5 pct
By Edward Krudy
NEW YORK, Feb 20 (Reuters) - U.S. stocks fell the most in three months and a key gauge of market volatility spiked on Wednesday after minutes from the U.S. Federal Reserve's most recent meeting suggested the central bank may slow or stop buying bonds sooner than expected.
The minutes from the Fed's January meeting showed many officials voiced concern last month over potential costs of more asset purchases, suggesting that the program, known as QE, may slow before the pickup in hiring it was intended to deliver.
"What Wall Street wants to hear is an absolute sign that the Fed will continue with QE for the indefinite future. When it says we may end it faster, that just raises the uncertainty, and the market hates that," said Todd Schoenberger, managing partner at LandColt Capital in New York.
Wednesday's slide marked a rare return of nervousness to markets after their solid march higher this year. The CBOE Volatility index, or the VIX, a measure of investor fear, jumped 19.3 percent - the biggest daily gain for the VIX since November 2011.
In a sign of broad market weakness, the number of declining stocks outnumbered advancers by a ratio of more than 3 to 1 on both the New York Stock Exchange and the Nasdaq. The volume of traded shares hit its second-highest level this year.
Prominent stocks in a range of sectors booked sharp losses after disappointing earnings and outlooks, including homebuilder Toll Brothers, fertilizer maker CF Industries and oil and gas producer Devon Energy Corp.
A slide in the commodity sector also weighed on stocks. Spot gold dropped to the lowest level since July, benchmark industrial metal copper fell to a one-month low, and U.S. crude oil futures shed more than $2 a barrel.
On Wall Street, the Dow Jones industrial average dropped 108.13 points, or 0.77 percent, to 13,927.54 at the close. The Standard & Poor's 500 Index fell 18.99 points, or 1.24 percent, to 1,511.95. The Nasdaq Composite Index lost 49.19 points, or 1.53 percent, to end at 3,164.41.
For the benchmark S&P 500, the day's decline was the largest since Nov. 14.
The Fed has used quantitative easing, or QE, since 2008 as it aims to stimulate the economy. The policy, which involves expanding the Fed's balance sheet to buy bonds, has been credited with pushing money into the stock market and it withdrawal is a wild card for markets.
Still, the S&P 500 has jumped about 6 percent so far this year. Many analysts have been expecting the market to ease after the Dow and the S&P 500 came close to all-time highs.
Energy companies' shares were among the weakest, hurt by disappointing results in the sector and a 2 percent drop in crude oil prices. The Energy Select Sector SPDR exchange-traded fund fell 2.1 percent.
Newfield Exploration tumbled 9.3 percent to $24.75 while Devon Energy Corp dropped 6.6 percent to $56.57. Both companies posted fourth-quarter losses, with Devon hurt as it wrote down the value of its assets by $896 million because of weak natural gas prices.
Earlier in the day, unconfirmed rumors that a troubled hedge fund was selling assets added some downward pressure to the market. The rumors appeared to be unfounded.
"I heard the chatter about a hedge fund liquidating things today but how big, I don't know. Certainly, it sparks concern," said Michael James, senior trader at Wedbush Morgan in Los Angeles.
Housing shares also declined, pressured by weaker-than-expected results at Toll Brothers Inc and a drop in groundbreaking to build new U.S. homes, also known as housing starts, in January.
Toll Brothers' stock fell 9.1 percent to $33.56, but is up about 4 percent so far this year, building on a jump of nearly 60 percent in 2012. The Dow Jones U.S. Home Construction index lost 6.7 percent.
"Valuations appear a bit high at these levels, and if I was in a name that had seen a huge run, I'd want to take some chips off the table," said Matt McCormick, money manager at Bahl & Gaynor in Cincinnati.
The Dow's losses were limited by Boeing Co, up 0.2 percent at $74.78 after a source told Reuters that the company had found a way to fix battery problems on its grounded 787 Dreamliner jets. Concerns over that line have weighed on Boeing recently, contributing to a 2 percent drop in the stock's price in January.
Shares of OfficeMax Inc fell 7 percent to $12.09 while Office Depot slid 16.7 percent to $4.18 as the companies announced a $1.2 billion merger agreement. The shares had surged in Tuesday's session after a source said a deal would be announced.
Rival Staples Inc fell 7.2 percent to $13.60 and ranked as one of the S&P 500's biggest decliners.
About 7.49 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, above the 6.48 billion daily average so far this year.
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