* Citigroup shares slump after Fed rejects capital plan
* GDP grew 2.6 pct in Q4; jobless claims unexpectedly drop
* BofA to pay $9.3 bln to settle mortgage bond claims
* Indexes down: Dow 0.3 pct, S&P 0.3 pct, Nasdaq 0.4 pct (Updates to open, adds Morning News Call link)
By Ryan Vlastelica
NEW YORK, March 27 (Reuters) - U.S. stocks fell on Thursday as a report showing modest economic growth in the fourth quarter was not viewed as positive enough to offset lingering geopolitical uncertainties, with the S&P 500 near record levels.
Markets were also pressured by a steep decline in Citigroup Inc shares, which suffered their biggest daily drop since November 2012 after the Federal Reserve rejected the bank's capital plan.
Gross domestic product expanded at a 2.6 percent annual rate in the fourth quarter, the Commerce Department said, up from the 2.4 percent pace it estimated last month but slightly under the 2.7 percent analyst forecast. Jobless claims unexpectedly fell in the latest week, dropping to near a four-month low, the latest indicator to support a theory that weak data earlier this year was related to bad weather rather than worsening fundamentals.
"We need surprisingly good news to jar the market out of its trading range, and today's data, while respectable, isn't that," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
The U.S. and the European Union on Wednesday agreed to prepare possibly tougher economic sanctions in response to Russia's annexation of Ukraine's Crimea territory.
While Western leaders earlier said they would hold off on new sanctions unless Moscow takes further destabilizing actions in the region - which Russian President Vladimir Putin last week said he wasn't interested in doing - investors are concerned about the potential fallout of a prolonged conflict.
"Bigger sanctions would inflict damage on Russia, and there could be a spillover on Europe's economy, especially in the energy space, which would have a broader impact," said Luschini, who helps oversee about $63 billion in assets. "This is an element of concern in a market where we don't have overwhelmingly good news to trump it."
Citigroup slumped 5.9 percent to $47.18 a day after the Fed rejected the bank's plan to buy back $6.4 billion of shares and boost dividends, saying it wasn't sufficiently prepared to handle a potential financial crisis. A source close to the matter told Reuters that Citi officials had not expected the rejection. Shares of Zions Bancorp, which also had its plan rejected, fell 1.5 percent to $29.76.
The Dow Jones industrial average was down 43.03 points, or 0.26 percent, at 16,225.96. The Standard & Poor's 500 Index was down 4.85 points, or 0.26 percent, at 1,847.71. The Nasdaq Composite Index was down 15.17 points, or 0.36 percent, at 4,158.41.
Equities have been volatile this week, moving on any sign of easing or rising tensions in the biggest conflict between Russia and the United States since the Cold War. While data has supported the market, investors used the uncertainty over Ukraine to take profits in some of the market's biggest outperformers, especially in the technology and biotech sectors. Still, the S&P 500 is about 2 percent away from an all-time closing high reached earlier this month.
The financial Select Sector SPDR ETF was little changed on the day, with the weakness from Citigroup countered by a 1.6 percent rise in Bank of America, which rose after it agreed to pay $9.3 billion to settle claims that it sold Fannie Mae and Freddie Mac faulty mortgage bonds. The settlement helps the bank end one of the largest legal headaches it still faced from the financial crisis.
Yum Brands Inc, which has heavy exposure to China, said its KFC chain was planning an overhaul of its China menu and launching a publicity drive as it struggled to emerge from the shadow of a food-safety scare in 2012. Shares fell 1.6 percent to $72.96.
TriNet Group Inc rose 12.6 percent to $18.05 in its trading debut a day after it priced its initial public offering at $16 per share, which valued the cloud-based payroll processor at about $1.09 billion.
Pending home sales fell 0.8 percent in February, dropping to their lowest level in more than two years, the National Association of Realtors said. Analysts were expecting flat sales in the month. (Editing by Bernadette Baum)