* Obama warns of U.S. action as jihadists push on Baghdad
* Oil hits year's high on Iraq violence; energy shares climb
* Lululemon falls on results
* Dow off 0.7 pct; S&P 500 down 0.7 pct; Nasdaq off 0.9 pct (Updates to mid-afternoon)
By Angela Moon
NEW YORK, June 12 (Reuters) - U.S. stocks fell to session lows on Thursday afternoon as concerns escalated about Iraq and after disappointing economic data on consumers and the labor market.
Hours after ethnic Kurdish forces took control of the oil hub of Kirkuk after the Shi'ite-led government's troops abandoned their posts, President Barack Obama was asked if he might order drone strikes or other action to halt the insurgency that has seized much of northern Iraq this week.
Obama told reporters that he refused to rule out U.S. action in Iraq against Sunni Islamist militants who have surged out of the north toward Baghdad, threatening to divide the country and establish their own jihadist state.
The stock market's losses quickly accelerated following Obama's comments, with industrials and consumer discretionary sectors leading the decline.
The CBOE Volatility index VIX initially jumped 9 percent to 12.67.
State Department spokeswoman Jen Psaki followed Obama's comments by telling a daily briefing that the administration was considering all options, except for sending U.S. troops into Iraq.
After she spoke, the VIX pulled back slightly and was up 8 percent at 12.53.
"It's a bit of a crisis mode here. Geopolitical concerns have definitely taken over. It's a very fluid situation and things are happening very fast, it seems," said Timothy Ghriskey, chief investment officer of Solaris Asset Management LLC in New York.
The Dow Jones industrial average fell 110.91 points or 0.66 percent, to 16,732.97. The S&P 500 lost 14.03 points or 0.72 percent, to 1,929.86. The Nasdaq Composite dropped 37.19 points or 0.86 percent, to 4,294.74.
The Dow touched an intraday low at 16,723.73, while the S&P 500 fell as low as 1,928.27 and the Nasdaq slid to a session low at 4,289.18.
In macroeconomic news, retail sales rose 0.3 percent in May, half the growth rate that economists had forecast. Americans' new claims for unemployment benefits unexpectedly rose last week.
While both economic indicators were below expectations, neither was seen as so weak as to change the perception of improving economic conditions, and the market's recent uptrend is still viewed as intact. Despite a two-day drop in the S&P 500, the benchmark index is only 1.1 percent below its record close.
Energy shares were the only gainers on Thursday. The S&P energy sector index was up 0.4 percent. Oil prices hit the highest for the year on worries that escalating violence in Iraq could disrupt oil supplies from the major OPEC exporter.
Geron Corp was one of the Nasdaq's most-active stocks, jumping 19.2 percent to $3.10 on heavy volume after the U.S. Food and Drug Administration lifted a partial clinical hold on a study testing its blood cancer drug.
Lululemon Athletica Inc fell 15.4 percent to $37.48 on heavy volume. The athletic apparel retailer cut its full-year earnings and revenue outlook.
In contrast to the overall market's downturn, Restoration Hardware Holdings Inc surged 12.7 percent to $80.41 a day after the luxury home goods retailer's first-quarter results. (Reporting by Angela Moon; Editing by Jan Paschal)