* Non-manufacturing activity index drops to 51.4 in August - ISM
* Financial stocks drag down S&P 500
* Spectra Energy jumps on Enbridge deal
* Cepheid soars on $4 bln Danaher offer
* Dow down 0.06 pct, S&P down 0.05 pct, Nasdaq up 0.18 pct (Adds details, comments, updates prices)
By Yashaswini Swamynathan
Sept 6 (Reuters) - The S&P 500 index and the Dow pared gains on Tuesday as financial stocks were weighed down by weak services data.
The U.S. economy’s service sector expanded in August but at a slower pace than in July, and the fall from the previous month was the largest since the 2008 financial crisis, a report by the Institute for Supply Management (ISM) showed.
The report follows Friday’s weaker-than-expected employment data, which raised doubts about the health of the economy and its ability to absorb an interest rate hike in the near term.
The S&P 500’s financial index dropped 0.64 percent, its biggest decline in nearly one month, dragged down by banks including Wells Fargo, Bank of America and JPMorgan. Goldman’s 1.2 percent decline weighed most on the Dow.
Federal Reserve Chair Janet Yellen said last month that the case for higher rates had strengthened, citing a strong labor market.
However, the recent spate of weak data can prevent the Fed from pulling the trigger anytime this year.
“In the last week alone, every major data point has missed estimates and that raises some major questions of what the Fed’s next move is going to be,” said Adam Sarhan, CEO at Sarhan Capital.
“The market is asking the Fed where its hawkish data to support a rate hike is coming from.”
The chances of a rate hike in September dropped to 15 percent from 21 percent after the ISM data. Those odds fell to 46.9 percent from 50.6 percent for December, according to CME Group’s FedWatch tool.
The dollar index fell by the most since July 29.
At 11:17 a.m. ET (1517 GMT), the Dow Jones Industrial Average was down 11.37 points, or 0.06 percent, at 18,480.59.
The S&P 500 was down 1.09 points, or 0.05 percent, at 2,178.89.
The Nasdaq Composite was up 9.69 points, or 0.18 percent, at 5,259.59.
Five of the 10 major S&P 500 indexes were lower, with financials being the worst performer. Utilities and telecom services - defensive parts of the markets - were the top percentage gainers.
Spectra Energy jumped 13.2 percent to $40.9, giving the S&P 500 its biggest boost, after Enbridge agreed to buy the company for $28 billion.
Cepheid soared 52 percent after the diagnostics company agreed to be bought by Danaher for $4 billion, including debt. Danaher’s shares were down 2.1 percent.
Navistar also jumped 52 percent after Volkswagen agreed to supply engines to the U.S. truck maker in exchange for a 16.6 percent stake.
Monsanto edged up 0.65 percent after German chemical maker Bayer sweetened its bid to buy the world’s largest seed company.
Declining issues outnumbered advancing ones on the NYSE by 1,432 to 1,411. On the Nasdaq, 1,369 issues fell and 1,349 advanced.
The S&P 500 index showed 31 new 52-week highs and no new lows, while the Nasdaq recorded 127 new highs and 14 new lows.
Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D'Silva