US STOCKS-Wall St drops as biotechs, semis sink Nasdaq

* Durable goods data unexpectedly weak

* Kraft, Kofax surge on M&A deals

* Indexes off: Dow 1.62 pct, S&P 1.46 pct, Nasdaq 2.37 pct (Adds Red Hat earnings)

By Chuck Mikolajczak

NEW YORK, March 25 (Reuters) - U.S. stocks dropped on Wednesday as a slump in technology and biotechs sent the Nasdaq to its biggest decline in nearly a year while the S&P 500 fell through key support levels.

Semiconductors and biotech stocks weighed heavily on the Nasdaq, suffering their third straight session of declines after strong gains in the prior week.

An index of biotechnology shares was down 4.1 percent for the session, its biggest fall since Dec. 23. The index finished below its 14-day average for the first time since Feb. 11 and its 50-day moving average for the first time since Oct. 17.

The PHLX semiconductor index slumped 4.6 percent for its biggest percentage decline since Oct. 10 and also ended the session below both its 14-day and 50-day moving averages.

"Brutal day in the markets," said Peter Kenney, chief market strategist at Clearpool Group in New York. "Recent leadership represented the best opportunity to manage risk, meaning ring the register, and that certainly was an important driver of the kind of action we saw today."

Losses on the S&P 500 accelerated around mid-session after the benchmark dropped below a support level near 2,085, and late selling pressure pushed the benchmark index below its 50-day moving average at around 2,067.

An earlier government report showing a drop in durable goods orders pushed the dollar index lower, giving initial support to equities as it eased fears that the rally in the U.S. currency would hurt corporate earnings. However, with valuations stretched as stock indexes trade near record highs, strong data is needed to justify valuations.

The Dow Jones industrial average fell 292.6 points, or 1.62 percent, to 17,718.54, the S&P 500 lost 30.45 points, or 1.46 percent, to 2,061.05 and the Nasdaq Composite dropped 118.21 points, or 2.37 percent, to 4,876.52.

Kraft Foods (NasdaqGS: KRFT - news) surged 35.6 percent to $83.17 after a merger agreement with ketchup maker H.J. Heinz Co, owned by 3G Capital (Other OTC: CGHC - news) and Berkshire Hathaway (Sao Paolo: BERK34.SA - news) . Berkshire Class B shares slipped 0.5 percent to $143.56.

Kofax Ltd rallied 46 percent to $10.95 after Lexmark International, known for its printers, said it would buy Kofax in a deal of about $1 billion that would double the size of its enterprise software business. Lexmark shares climbed 6.1 percent to $43.27.

After the closing bell, Red Hat (NYSE: RHT - news) shares gained 4.6 percent to $71.61 as the world's largest commercial distributor of the Linux operating system posted quarterly results and authorized a $500 million share buyback plan.

Volume was active, with about 7 billion shares traded on U.S. exchanges, slightly above the 6.75 billion average so far this month, according to BATS Global Markets.

Declining issues outnumbered advancing ones on the NYSE by 2,240 to 803, for a 2.79-to-1 ratio; on the Nasdaq, 2,242 issues fell and 509 advanced, for a 4.40-to-1 ratio.

The S&P 500 posted 11 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 62 new highs and 33 new lows. (Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Christian Plumb)