* Seventythree pct of Dow, 67 pct S&P stocks in correction territory
* All 10 S&P sectors down; eight in the red for the year
* Energy stock hit as U.S. crude falls below $40/barrel
* Indexes down: Dow 2.3 pct, S&P 2.3 pct, Nasdaq 2.5 pct (Updates to late afternoon trading, changes byline)
By Chuck Mikolajczak
Aug 21 (Reuters) - U.S. stocks slumped late in the trading session on Friday as the S&P broke below the 2,000 level and the Dow slipped closer towards correction territory as fears of a China-led global slowdown continued to rattle investors.
A report overnight showed China's manufacturing sector shrank at the fastest pace since 2009, exacerbating worries about the health of its economy and whether the government would take further steps to stem its slowdown.
The Russell 2000 also entered correction territory on an intraday basis, a 10 percent decline from its most recent high, and was down more than 9 percent from its closing high on June 19.
The sell-off was broad based, with all 10 major S&P sectors in the red, with the energy sector one of the worst performers as U.S. crude oil dipped below $40 a barrel for the first time since the 2009 financial crisis. Eight of the 10 sectors were down more than 1 percent. The S&P energy index dropped 2.6 percent.
The CBOE Volatility index, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped as much as 31.4 percent to 25.14, a more than 20-month high. The index also notched its biggest weekly percentage gain for the year.
"Obviously (China) is a very concerning issue which is why you've had the steep decline you've had," said Stephen Massocca, Chief Investment Officer at Wedbush Equity Management LLC in San Francisco.
"They have got the market very concerned and what would add fuel to this fire - the Fed raising rates."
Many investors anticipate the U.S. central bank to begin to raise interest rates by the end of the year although expectations for a September hike were tempered after the release of the minutes from the Federal Reserve's July meeting on Wednesday.
Apple fell 4.6 percent to $107.44 as investors continued to fret over its prospects in China, a key growth market for the iPhone maker. The stock was the biggest drag on the S&P and the Nasdaq.
The Dow Jones industrial average fell 387.64 points, or 2.28 percent, to 16,603.05, the S&P 500 lost 46.78 points, or 2.3 percent, to 1,988.95 and the Nasdaq Composite dropped 121.79 points, or 2.5 percent, to 4,755.69.
Both the Dow and S&P were on track for their biggest weekly percentage drop since September 2011, while the Nasdaq was on pace for its biggest percentage fall since August 2011.
The drag from Apple served to push the technology sector down nearly 3 percent. The consumer staples index fell 1.9 percent, moving into the red for the year. Eight of the 10 S&P sectors are now in negative territory for the year.
Deere fell 8.1 percent to $83.31 after the tractor maker's quarterly profit slumped 40 percent.
Declining issues outnumbered advancing ones on the NYSE by 2,391 to 671, for a 3.56-to-1 ratio on the downside; on the Nasdaq, 1,682 issues fell and 1,119 advanced for a 1.50-to-1 ratio favoring decliners.
The benchmark S&P 500 index posted no new 52-week highs, on track for the first such occurrence since Aug. 8, 2011 after S&P downgraded the credit rating of the U.S., and 65 new lows; the Nasdaq Composite recorded 13 new highs and 255 new lows. (Reporting by Chuck Mikolajczak; Editing by James Dalgleish)