NEW YORK (Reuters) -Wall Street had its steepest decline in more than two months on Thursday, as more signs of weakness in the labor market and increasingly sluggish growth overseas fueled fears about the ability of the U.S. economy to stage a recovery.

The sour mood was set early in the session, after weekly government data showed an unexpected jump in the number of filings for jobless benefits, while a report by ADP Employer Services showed private employers cut 33,000 jobs in August.

The data fueled investor nervousness ahead of the government's key August non-farm payrolls report, and losses cascaded in afternoon trading. The Dow fell more than 340 points and only one of its 30 components escaped the sell-off.

Construction and mining equipment maker Terex Corp (TEX.N) compounded the gloom when it cut its 2008 sales and profit forecast, citing weak demand in Western Europe and North America. Top drags included economic bellwethers Caterpillar Inc (CAT.N) and General Electric (GE.N).

Financial stocks were also hammered, after Bill Gross, the manager of the world's biggest bond fund, Pimco, said that to halt what he called "a financial tsunami" the U.S. government should give the Treasury the right to buy debt and other assets. Gross said he was staying on the sidelines of the markets.

"It's definitely fear of an economic downturn that's hurting us today," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "The economic data and the downbeat forecasts from management don't lend a lot of confidence to the economic revival outlook."

The Dow Jones industrial average (.DJI) fell 344.65 points, or 2.99 percent, to 11,188.23, while the Standard & Poor's 500 Index (.SPX) dropped 38.15 points, or 2.99 percent, to 1,236.83. The Nasdaq Composite Index (.IXIC) tumbled 74.69 points, or 3.20 percent, to 2,259.04.

It was the biggest one-day percentage drop for the three major indexes since June 26.

It was also the fourth day of losses for both the Nasdaq and the S&P 500, and the S&P 500's longest losing streak since January.

Losses accelerated in the last hours of trading after the S&P 500 broke below the 1,260 level, a technical support level that had survived several tests in August.

Also in late afternoon trading, Pimco's Gross told CNBC television that his firm's clients and contacts around the world were "sitting on their hands as well," waiting for a major buyer to come into the asset markets.

Generally lackluster August retail sales were another headwind for the market, as were concerns that sluggish growth was emerging abroad. The president of the European Central Bank, Jean-Claude Trichet, said euro zone data points to weakening growth at midyear.

"The job market has been just a slow drip of bad news," said John Augustine, chief investment strategist at Fifth Third Asset Management in Cincinnati. "That's better than an open faucet, but it's still bad news for the economy. The stock market is struggling because it's waiting for better labor market news."

Economists expect the government's labor report on Friday to show a decline of 75,000 jobs in August, which would be the eighth consecutive month of job losses in the United States.

Shares of Caterpillar, the maker of bulldozers and excavators and a major exporter, fell 5.6 percent to $63.94. Terex shares fell 19.7 percent to $38.02.

Boeing's (BA.N) stock slid 4.6 percent to $63.03 after the plane maker's largest labor union said its members had rejected the company's contract offer and voted to strike.

Shares of investment bank Lehman Brothers (LEH.N) fell 10.5 percent to $15.17. Lehman's LibertyView hedge funds lost money in July, when tumbling financial markets left many hedge fund managers nursing their biggest declines of the year, according to a note to investors obtained by Reuters.

Shares of technology companies, considered vulnerable because of their overseas exposure, tumbled. Networking equipment maker Cisco Systems (CSCO.O) was a top drag on the S&P 500, with a drop of 4.4 percent at $22.28 on Nasdaq.

BlackBerry devices maker Research In Motion (RIM.TO) (RIMM.O) was the top Nasdaq drag, falling 6.4 percent to $107.49. Shares of iPhone maker Apple (AAPL.O) dropped 3.4 percent to $161.22.

U.S. communications equipment maker Ciena Corp (CIEN.O) slashed its revenue outlook due to phone companies delaying purchases amid a weak economy. Its shares fell 24.9 percent to $13.09.

Trading was moderate on the New York Stock Exchange, with about 1.3 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.3 billion shares traded, above last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by 5 to 1 on the NYSE and by 4 to 1 on the Nasdaq.

(Additional reporting by Ellis Mnyandu and Steven C. Johnson; Editing by Leslie Adler)