* Sept nonfarm payrolls up by 142,000 vs 203,000 expected
* Unemployment rate unchanged at 5.1 pct
* Banks fall as chance of rate hike this year recedes
* Indexes down: Dow 1.26 pct, S&P 1.24 pct, Nasdaq 1.18 pct (Adds details, changes quote, updates prices)
By Tanya Agrawal
Oct 2 (Reuters) - U.S. stocks dropped sharply on Friday after jobs data for September fell far short of expectations, raising doubts that the economy is robust enough to absorb an interest rate hike.
The three major indexes were down more than 1 percent.
Nonfarm payrolls rose by 142,000, below the 203,000 that economists had expected, and August figures were revised sharply lower. The jobless rate held steady at 5.1 percent but average hourly wages fell by a cent from August.
This is the last payrolls data before the Fed meets later this month.
Economists said the disappointing data could put off an interest rate increase until next year.
A small hike in rates would be a vote of confidence in the economy and help calm volatile equity markets.
"This is creating uncertainties, and it's all about uncertainties," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
"I think it's going to be a market where we're going to see more and more volatility and major support levels being tested."
U.S. interest rates futures rose sharply after the jobs report. Odds of a December rate hike fell to a little over 27 percent, compared with 44 percent shortly before the report.
The Fed cited global economic uncertainties as a reason for keeping rates near zero in September.
The jobs report, the last before the Fed's meeting at the end of October, appeared to belie Fed Chair Janet Yellen's comment last week that the U.S. economy was strong enough to withstand a rate hike this year.
Economists say putting the United States on the path of higher interest rates is needed to give the Fed ammunition to deal with any future recession.
Fed Vice Chair Stanley Fischer is scheduled to speak in Boston at 1:30 p.m ET (1730 GMT).
At 10:27 a.m. ET, the Dow Jones industrial average was down 204.57 points, or 1.26 percent, at 16,067.44, the S&P 500 was down 23.87 points, or 1.24 percent, at 1,899.95 and the Nasdaq composite was down 54.70 points, or 1.18 percent, at 4,572.39.
Banks, which would benefit from higher interest rates, were among the biggest losers. Goldman Sachs' 3 percent fall weighed the most on the Dow.
All of the 10 major sectors were lower, with the financial index's 2.7 percent fall leading the decliners. The utilities index was the only index in the black.
Bonds prices rallied and the dollar fell 1 percent against a basket of major currencies after the report.
The CBOE Volatility index, known as the "fear gauge", jumped 7.2 percent to 24.18, above its long-term average of 20.
The S&P 500 and the Nasdaq closed slightly higher on Thursday in a choppy start to the fourth quarter as investors waited for the jobs report and the quarterly earnings season.
Micron Technology was up 5.5 percent at $15.62 after the chipmaker posted better-than-expected quarterly earnings.
Declining issues outnumbered advancing ones on the NYSE by 2,119 to 771. On the Nasdaq, 1,806 issues fell and 718 advanced.
The S&P 500 index showed one new 52-week high and 55 new lows, while the Nasdaq recorded four new highs and 147 new lows.
Reporting by Tanya Agrawal; Additional reporting by Abhiram Nandakumar; Editing by Savio D'Souza and Saumyadeb Chakrabarty