* Oil prices drop 2 pct
* Ford falls 10 pct, weighs most on S&P
* Indexes down: Dow 0.4 pct, S&P 0.2 pct, Nasdaq 0.05 pct (Updates to early afternoon)
By Yashaswini Swamynathan
July 28 (Reuters) - The S&P 500 index and the Dow edged lower on Thursday as investors fretted about weak economic data and disappointing earnings from Ford.
The carmaker reported weak China sales and declared that the U.S. auto industry's long recovery was at an end, triggering a 9.6 percent fall in its shares. The stock was the biggest drag on the S&P 500 index.
Ford's dismal forecast rattled the automobile market, with shares of General Motors falling 4 percent and Fiat Chrysler 6 percent.
A report by the U.S. Labor Department showed that the number of people claiming unemployment benefits rose more than expected to 266,000 for the week ended July 22.
Energy shares took a hit after oil prices fell 2 percent. Exxon and Chevron dropped more than 1 percent.
However, gains in Amazon.com, ahead of its results on Thursday, helped the Nasdaq limit losses.
Strong economic data had put Wall Street on a record-setting run in the past weeks, with the S&P 500 breaking its all-time high six times in 13 days.
"When you've got a one-way market, which we've had for several weeks, it is bound to consolidate or rest a bit," said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management.
"You also have some negative earnings reports and oil prices are back on people's mind as it approaches the $40 level."
At 12:38 p.m. ET (1638 GMT), the Dow Jones Industrial Average was down 74.71 points, or 0.4 percent, at 18,397.46.
The S&P 500 index was down 4.28 points, or 0.2 percent, at 2,162.3.
The Nasdaq Composite index was down 2.58 points, or 0.05 percent, at 5,137.23.
Eight of the 10 major S&P 500 sectors were lower, with the telecom services index falling the most. Consumer staples and utilities indexes were flat.
Declining issues outnumbered advancing ones on the NYSE by 1,538 to 1,298. On the Nasdaq, 1,639 issues fell and 1,096 advanced.
The S&P 500 index showed 25 new 52-week highs and no new lows, while the Nasdaq recorded 90 new highs and 22 new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D'Silva)