(Corrects to "four months" from "seven months" in paragraph 17)
* Greece will not pay IMF on Tuesday: Govt official
* Nine of 10 S&P sectors in the red
* Financials weigh on the S&P
* CBOE Volatility index spikes 25 pct
* Euro STOXX 50 index - biggest one-day fall since 2011
* Indexes down: Dow 1.34 pct, S&P 1.41 pct, Nasdaq 1.59 pct
By Sweta Singh
June 29 (Reuters) - U.S. stocks extended their losses in heavy trading on Monday, adding to a global selloff, after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
The crisis worsened after a Greek government official said the country would not pay a 1.6 billon euro loan installment due to the International Monetary Fund on Tuesday.
All three major indexes fell more than 1 percent on the same day for the first time in more than a month as investors dropped riskier assets such as equities and commodities.
The Dow Jones Industrial Average turned negative for the year. The last time it showed an annual decline was in 2008.
Volatility rose sharply as nine of the 10 main S&P sectors retreated. The only group to rise was utilities, considered a defensive play.
In Europe, the blue-chip Euro STOXX 50 index suffered its biggest one-day fall since 2011.
The European Central Bank froze funding to Greek banks, forcing Athens to shut banks for a week to keep them from collapsing.
"A week ago, it seemed very likely that we were close to having a resolution, and now all of a sudden we're waking up to capital controls?" said Leo Grohowski, who oversees about $194 billion in client assets as chief investment officer at BNY Mellon Wealth Management in New York.
"I'm not confident that today reflects all the bad news that could happen. Investors are really bumping up the odds that Greece will exit the euro," Grohowski said.
While the Greek economy is small, and U.S. corporations have limited exposure to the country, investors are concerned about the fallout across Europe if the country exits the euro zone.
A snap Reuters poll of economists and traders found a median 45 percent probability that Greece would leave the euro zone.
Adding to the uncertainty, Chinese stocks closed sharply lower after a volatile day of trading despite surprise monetary easing by the central bank.
Concerns about Puerto Rico and its ability to pay its debts also worried some investors.
In U.S. data, the pending home sales index, issued by the National Association of Realtors, rose to a nine-year high.
Investors have been keeping a close eye on data to see if the U.S. economy has recovered from a slow start at the beginning of the year. The Federal Reserve has said it will raise rates when it sees a sustained rebound in the economy.
A September interest rate hike is "very much in play" if the U.S. economy continues to strengthen, though the Federal Reserve could also wait until December to start tightening policy, New York Fed President William Dudley told the Financial Times in an interview.
The CBOE Volatility index, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped as much as 25 percent to 17.53 points, its highest in more than four months.
At 13:44 p.m. EDT (1744 GMT) the Dow Jones industrial average was down 240.22 points, or 1.34 percent, at 17,706.46, the S&P 500 was down 29.54 points, or 1.41 percent, at 2,071.95 and the Nasdaq Composite was down 80.81 points, or 1.59 percent, at 4,999.69.
The financials weighed down the S&P 500 with a 1.7 percent decline.
Wells Fargo, down 1.7 percent, was the biggest drag on the financial index. Goldman Sachs weighed the most on the Dow with a 1.8 percent decline.
U.S. banks have an exposure to $12.7 billion of Greek debt.
Visa fell 2.6 percent and Mastercard 1.7 percent.
Ameriana Bancorp shares rose 36 percent at $21.32 after First Merchants and Ameriana agreed to merge in a $68.8 million deal. The stock was the biggest percentage gainer on the Nasdaq.
Assured Guaranty and MBIA Inc fell more than 12 percent after BTIG downgraded the insurers on concerns over Puerto Rico's debts.
Declining issues outnumbered advancers on the NYSE by 2,735 to 360. On the Nasdaq, 2,245 issues fell and 509 advanced.
The S&P 500 index showed two new 52-week highs and 21 new lows, while the Nasdaq recorded 45 new highs and 92 new lows. (Additional reporting by Siddharth Cavale in Bengaluru; Editing by Saumyadeb Chakrabarty)