* Dow Jones industrial average has worst session since Feb
* Disney tumbles after rare earnings miss
* Fossil slumps on forecast cut
* Office Depot, Staples slump after calling off merger
* Indexes end down: Dow 1.21 pct, S&P 0.96 pct, Nasdaq 1.02 pct (Updates to close)
By Noel Randewich
May 11 (Reuters) - U.S. stocks dropped on Wednesday and the Dow Jones industrial average suffered its worst day since February as feeble quarterly reports from Walt Disney, Macy's and Fossil undermined confidence across the consumer sector.
The consumer discretionary index fell 1.98 percent, notching its worst day in three months, with all but three of its 88 components losing ground.
The biggest drag on the Dow, Disney dropped 4.04 percent after it posted a rare earnings miss.
Department store Macy's tumbled 15.17 percent to its lowest since 2011, while watch maker Fossil sank as much as 34 percent to a 2009 low after the two companies slashed their full-year forecasts.
Adding to gloom in retail stocks, Office Depot slumped 40.39 percent and Staples dropped 18.34 percent. The two terminated plans to merge after a U.S. federal judge ordered the deal temporarily halted because of concerns it would reduce competition.
All of the 10 major S&P sectors fell except for utilities , which gained 0.24 percent.
The S&P 500's decline undid gains from a rally the day before driven by Amazon.com, the online seller that has caused so much trouble for Macy's and other traditional stores in recent years.
"There is no pricing strength, there is no income growth and you have Amazon staring you in the face soaking up a lot of orders," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville. "They are getting battered everywhere they look."
The S&P consumer discretionary index recently traded at about 18 times expected earnings, expensive compared to the S&P 500's PE of 16, according to Thomson Reuters data.
The past two sessions' gyrations may be indicative of what is in store for the next several days as the quarterly earnings season winds down and traders focus on macroeconomic data, said Eric Wiegand, senior portfolio manager at U.S. Bank's Private Client Reserve.
"We could see decent moves in either direction but not necessarily confirming a long-term trend."
The Dow slumped 1.21 percent to 17,711.12 points, its biggest one-day drop since February 11. The S&P 500 lost 0.96 percent to 2,064.46.
The Nasdaq Composite dropped 1.02 percent to 4,760.69.
About 7.0 billion shares changed hands on U.S. exchanges, just below the 7.2 billion daily average for the past 20 trading days, according to Thomson Reuters data.
First-quarter earnings for S&P 500 companies have mostly beaten analysts' expectations, but are estimated to have fallen 5.4 percent from a year ago, according to Thomson Reuters data.
Other retailers slammed on Wednesday included Kohl's , Nordstrom and Dillard's, all down more than 6 percent.
Declining issues outnumbered advancing ones on the NYSE by 1,895 to 1,092. On the Nasdaq, 1,994 issues fell and 821 advanced.
The S&P 500 index showed 38 new 52-week highs and seven new lows, while the Nasdaq recorded 51 new highs and 57 new lows. (Additional reporting by Tanya Agrawal; Editing by Savio D'Souza and Meredith Mazzilli)