* ISM's factory activity index drops to 49.4 in August
* Jobless claims rise to 263,000 last week vs est. 265,000
* Energy weighs amid supply concerns
* Dow down 0.16 pct, S&P down 0.24 pct, Nasdaq up 0.09 pct (Updates to mid-afternoon, changes byline)
By Chuck Mikolajczak
NEW YORK, Sept 1 (Reuters) - The S&P 500 and the Dow dipped on Thursday after sluggish monthly factory activity data dented optimism about the economy and oil prices declined, as investors exercised caution ahead of a payrolls report on Friday.
A report from the Institute of Supply Management showed U.S. factory activity contracted for the first time in six months in August as new orders and production tumbled, but data on the labor market pointed to a pickup in third quarter economic growth.
Energy shares, down 0.9 percent, also weighed as oil prices declined on worries about a supply glut. U.S. crude was off 3.1 percent at $43.31 a barrel while Brent shed 2.9 percent to $45.52.
"Both the lower oil prices and the ISM show weakness in the economy," said Tim Ghriskey, chief investment officer of Solaris Asset Management in New York.
"There's fear that there's a disconnect between what the Fed might do and what the data is showing us."
The Nasdaq managed to edge higher, buoyed by a 4.5-percent gain in Charter Communications. S&P Dow Jones Indices said the cable services company would replace EMC Corp in the S&P 500 after the close of trading on Sept. 7.
Gains in tech companies Microsoft, up 0.2 percent and Apple, up 0.4 percent also buoyed the index.
The economic data comes ahead of Friday's monthly nonfarm payrolls data which could influence the Fed's decision on the timing of the next interest rate hike.
Solid performance in the labor market has spurred hawkish comments from some Fed officials in recent weeks. On Thursday, Cleveland Fed President Loretta Mester said the U.S. labor market is at full strength and the Federal Reserve needs to be on a path of gradual interest rate increases.
Traders have priced in a 24 percent chance of a hike in September, matching the probability from the prior session. The odds for a hike in December stand at 53.6 percent, according to the CME Group's FedWatch tool.
The Dow Jones industrial average fell 29.28 points, or 0.16 percent, to 18,371.6, the S&P 500 lost 5.31 points, or 0.24 percent, to 2,165.64 and the Nasdaq Composite added 4.60 points, or 0.09 percent, to 5,217.82.
U.S. auto sales fell in August, and some major automakers said a long-expected sales decline has begun or, at best, industry sales have hit a plateau. General Motors shares slipped 0.5 percent to $31.75 while Ford Motor lost 1.6 percent to $12.40.
Declining issues outnumbered advancing ones on the NYSE by a 1.70-to-1 ratio; on Nasdaq, a 1.41-to-1 ratio favored decliners.
The S&P 500 posted 14 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 96 new highs and 25 new lows. (Additional reporting by Sam Forgione; Editing by Nick Zieminski)