* Canadian Pacific approached CSX about merger -WSJ
* VIX at highest close since June 2012
* Dow down 1.4 pct, S&P down 1.7 pct, Nasdaq down 1.5 pct (Updates to close)
By Caroline Valetkevitch
NEW YORK, Oct 13 (Reuters) - U.S. stocks dropped more than 1 percent on Monday, with the S&P 500 closing below a key technical support level, as declines in energy and airline shares led a late-day selloff.
The S&P energy sector lost 2.9 percent, extending recent losses. It is down 7.6 percent for the last three sessions, its worst three-day slide since September 2011.
Five of the 10 S&P 500 sector indexes - industrials, telecommunications, consumer discretionary and materials - were in negative territory for the year.
The day's declines followed the S&P and Nasdaq's worst weekly percentage declines since May 2012 and concerns that the market is in for further weakness and more jolts. The CBOE Volatility index ended at 24.64, its highest close since early June 2012.
In a potential sign of more declines ahead, the S&P 500 closed below its 200-day moving average for the first time since Nov. 16, 2012. It has lost 4.8 percent in the last three sessions, its worst three-day decline since November 2011.
Airline stocks fell after a Dallas nurse contracted Ebola while caring for a dying Liberian patient.
"It's just a spillover on the Ebola concerns. Whether it's correct or incorrect, trader opinion right now is continued worsening of the Ebola situation is going to have a negative effect on travel and leisure," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.
Shares of United Airlines fell 7.3 percent to $40.55, while shares of Delta Air Lines dropped 6.1 percent to $30.90. Shares of Carnival were down 4.6 percent at $33.88. The Dow Jones transportation average fell 2.2 percent.
The Dow Jones industrial average fell 223.03 points, or 1.35 percent, to 16,321.07, the S&P 500 lost 31.39 points, or 1.65 percent, to 1,874.74 and the Nasdaq Composite dropped 62.58 points, or 1.46 percent, to 4,213.66.
The largest percentage gainer on the S&P 500 was CSX Corp , up 5.9 percent, while the largest percentage decliner was QEP Resources, down 9.2 percent.
Canadian Pacific Railway Ltd has approached CSX about merging the two North American railroad operators to create a transcontinental carrier worth more than $60 billion, according to the Wall Street Journal.
The largest percentage gainer on the Nasdaq 100 was F5 Networks INC, up 1.9 percent, while the largest percentage decliner was Expedia, down 5.8 percent.
Declining issues outnumbered advancing ones on the NYSE by 2,061 to 976, for a 2.11-to-1 ratio on the downside; on the Nasdaq, 1,525 issues were falling and 1,156 advancing for a 1.32-to-1 ratio favoring decliners.
The benchmark S&P 500 index posted three new 52-week highs and 53 new lows; the Nasdaq Composite showed 22 new highs and 308 new lows. (Editing by Nick Zieminski)