New York - Banking sector woes fuelled the sharpest drop in US stocks in the past month on Tuesday ahead of a key meeting of the Federal Reserve.

Shares of financial firms fell more than 3 per cent on average, led by a 5-per-cent drop in Bank of America Corp. All major stock indices fell more than 1 per cent.

Stocks have now fallen two straight days, putting the brakes on a sharp rally from last week. Many investors are waiting to see what the Federal Reserve will say after its board meeting ends Wednesday.

The central bank is almost certain to keep the benchmark interest rate at its historic low of 0-0.25 per cent, but investors will be looking for their take on the health of the economy.

Tuesday's declines overshadowed a Labour Department report that showed productivity surged an annualized 6.4 per cent in the second quarter, a further sign that the country's longest recession since the 1930s Great Depression is coming to an end.

The blue-chip Dow Jones Industrial Average tumbled 96.5 points, or 1.03 per cent, to close at 9,241.45. The broader Standard and Poor's 500 dropped back below the
1,000 mark, falling 12.75 points, or 1.27 per cent, to 994.35. The technology-heavy Nasdaq Composite Index plunged 22.51 points, or 1.13 per cent, to 1,69.73.

On currency markets, the dollar edged lower against the euro, closing at 70.66 euro cents from 70.71 euro cents on Monday. The dollar fell more sharply against the Japanese currency to 95.95 yen from 97.17 yen on Monday.(dpa)