* Latest China data points to slowing economy
* Ukraine tensions continue, Merkel warns Russia
* Initial claims fall, retail sales tops estimate
* Indexes off: Dow 1.16 pct, S&P 1 pct, Nasdaq 1.34 pct
By Chuck Mikolajczak
NEW YORK, March 13 (Reuters) - U.S. stocks dropped on Thursday on rising tension in Ukraine, which helped erase earlier gains spurred by better-than-expected data on retail sales and the labor market.
Selling accelerated after reports U.S. F-16 fighter jets landed at central Poland's Lask air base on Thursday to take part in military exercises seen as Washington's gesture of support for its eastern NATO allies. Volume on the S&P e-Mini futures totaled more than 27,000 contracts at 1:02 p.m. (1502 GMT).
Russia said it had started military exercises near the border with Ukraine, in what is likely to be seen as a show of force in the standoff with the West over Crimea. Ukraine's acting president said Russian forces were concentrated on the border "ready to invade," but he believed international efforts could end Moscow's "aggression" and avert the risk of war.
German Foreign Minister Frank-Walter Steinmeier said Germany assumes this weekend's referendum in Crimea will be followed by steps to absorb the region into Russia, and if there is no change in direction the European Union will be forced to consider a further, third stage of sanctions.
The comments reinforced earlier remarks from Germany's Angela Merkel, who warned Moscow it risked "massive" political and economic damage if it refused to change course on Ukraine.
"(Ukraine headlines) are certainly going to be the catalyst but there is more under the surface," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"There is no military solution to this. All it is, is positioning and let's be realistic, these Chinese numbers last night were not good."
China's economy slowed markedly in the first two months of the year, as growth in investment, retail sales and factory output all fell to multi-year lows.
The S&P 500 easily broke below its 10-day and 14-day moving averages, which were acting as short-term technical support levels. It also broke below the 1,850 level.
"A close under 1,845 is very ominous," said Mendelsohn.
The Dow Jones industrial average fell 189.39 points or 1.16 percent, to 16,150.69, the S&P 500 lost 18.67 points or 1 percent, to 1,849.53 and the Nasdaq Composite dropped 57.797 points or 1.34 percent, to 4,265.535.
Economically-sensitive sectors such as industrials , down 1.3 percent and technology, down 1.4 percent, were the worst performers. General Electric fell 1.3 percent to $25.43 while Apple Inc lost 1 percent to $531.45.
Earlier, gains were supported by better-than-expected weekly initial jobless claims and retail sales data for February, although the prior month of retail sales was revised lower.
Import prices increased 0.9 percent last month, their biggest rise in a year as petroleum soared, but there was little sign of a broad pick-up in imported inflation.
In the last piece of economic data on Thursday, business inventories rose 0.4 percent, in line with expectations, but a drop in sales meant it was now taking the longest time since late 2009 to move goods from shelves.