* ISM’s factory activity index drops to 49.4 in August
* Jobless claims rise to 263,000 last week vs est. 265,000
* Banks among top drags on S&P, Dow
* Dow down 0.04 pct, S&P down 0.12 pct, Nasdaq up 0.17 pct (Updates to early afternoon)
By Yashaswini Swamynathan and Mamidipudi Soumithri
Sept 1 (Reuters) - The S&P 500 and the Dow were slightly lower on Thursday, after sluggish monthly factory activity data dented optimism about the economy, even as investors count down to a crucial jobs report on Friday.
The Nasdaq was higher, boosted by Charter Communications , which rose 4.2 percent after the S&P Dow Jones Indices said the cable services company is set to join the S&P 500 index. Gains in Microsoft and Apple also buoyed the index.
A report from the Institute of Supply Management showed U.S. factory activity contracted for the first time in six months in August as new orders and production tumbled.
“It’s an under-50 ISM number. Given that the Fed is so data-dependent, the market is worrying about how that will affect the Fed’s decision,” said Ernie Cecilia, chief investment officer of Bryn Mawr Trust in Pennsylvania.
The report precedes Friday’s monthly nonfarm payrolls data which is likely to weigh on Fed while deciding the timing of the next interest rate hike.
Solid performance in the labor market and reduced risks to economic outlook have encouraged the Fed to take a more hawkish stance on raising rates.
However, any weakness in economic activity could scuttle plans for any rate increase this year.
Traders have priced in a 24 percent chance of a hike in September, down from 30 percent before the ISM data was released. The odds for a hike in December fell to 53.6 percent from 57.2 percent, according to the CME Group’s FedWatch tool.
At 12:38 p.m. ET (1638 GMT), the Dow Jones industrial average was down 7.19 points, or 0.04 percent, at 18,393.69.
The S&P 500 was down 2.65 points, or 0.12 percent, at 2,168.3.
The Nasdaq Composite was up 9.11 points, or 0.17 percent, at 5,222.33.
The S&P 500’s financial index saw its biggest decline in nearly two months after the ISM data raised doubts of a rate hike as early as this month.
“The financials have had a good run in the past few weeks, so there maybe some profit taking coming into the release of the employment numbers tomorrow,” Cecilia said.
Shares of Bank of America, JPMorgan, Wells Fargo and Citigroup fell between 1-1.6 percent and were among the top drags on the S&P.
Goldman Sachs fell 0.8 percent and pulled down the Dow the most.
A 2.6 percent drop in oil prices weighed down energy companies. Exxon was off 0.6 percent and Chevron fell 0.5 percent
Wynn Resorts was the top percentage gainer on the S&P, gaining 6.1 percent after Macau, the world’s biggest casino hub, posted a 1.1 percent rise in gambling revenue in August.
Declining issues outnumbered advancing ones on the NYSE by 1,629 to 1,255. On the Nasdaq, 1,421 issues fell and 1,269 advanced.
The S&P 500 index showed 13 new 52-week highs and two new lows, while the Nasdaq recorded 87 new highs and 22 new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Don Sebastian)