* Retail sales unexpectedly drop
* Investors lock in gains after record highs
* Futures down: Dow 40 pts, S&P 5.7 pts, Nasdaq 11 pts
By Leah Schnurr
NEW YORK, April 12 (Reuters) - Wall Street was set for a weaker open on Friday, pulling back from record levels set a day earlier, after retail sales unexpectedly dropped last month and as results from major banks failed to impress investors.
Futures extended losses after data showed retail sales fell 0.4 percent in March, while February's strong gain was revised down slightly. Consumer spending plays a key role in the U.S. economy, accounting for two-thirds of activity.
Investors have been rattled by indications economic growth could be softening, particularly after last week's disappointing jobs number, though that has not derailed the market rally so far.
"It shows that the economy continues to weaken and consumers are cautious," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "This also confirms the sequester's impact on the economy."
The Dow and benchmark S&P 500 closed at record highs on Thursday, extending this year's rally to a 13.4 percent gain for the Dow and 11.7 percent for the broader S&P.
The advance in equities in recent months has been partly due to the Federal Reserve's economic stimulus efforts, and analysts are viewing the first-quarter earnings season as a test for whether those gains are justified by corporate performance.
"I haven't seen good enough news to warrant this huge rise in the market," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
"This is a big earnings season because it would be nice to have (the) market's overall view sync up with a picture of the economy that is improving, not just not getting worse."
Wells Fargo was also lower, falling 1.6 percent to $36.90. The bank's profit was better-than-expected but it made fewer home loans.
Earnings for S&P 500 companies are expected to grow at a modest 1.2 percent in the first quarter, down from more than 4 percent forecast in January, according to Thomson Reuters data.
S&P 500 futures fell 5.7 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones (DJI: ^DJI - news) industrial average futures were down 40 points, and Nasdaq 100 futures lost 11 points.
Other economic data due Friday include consumer sentiment and business inventories.
Analysts said concerns over the euro zone debt crisis set a negative tone in the market Friday, with European Union finance ministers meeting during the day and Saturday, with Cyprus' bailout expected to be discussed.
Shares of J.C. Penney fell 1.2 percent to $14.68 after sources said Thursday the troubled retailer has hired Blackstone Group LP's financial advisory arm to explore how best to position the firm financially.