* Overseas data weak, but U.S. manufacturing gains
* Banks, materials may see biggest hit on sequester
* Groupon rallies after chief executive exits
* Indexes down: Dow 0.3 pct, S&P 0.4 pct, Nasdaq 0.6 pct
By Ryan Vlastelica
NEW YORK, March 1 (Reuters) - U.S. stocks fell on Friday, beginning March on a weak footing, as lackluster data in the U.S. and abroad pointed to a world economic recovery that struggles to gain traction.
While Wall Street rebounded off its lows of the session following an encouraging read on manufacturing, the benchmark S&P 500 remained on track to close out its worst week this year so far.
January personal income fell 3.6 percent in the U.S., its biggest drop in 20 years.
China's factory growth cooled to multi-month lows in February as domestic demand dipped, and euro zone manufacturing activity appeared no closer to recovery last month, as a dire performance in France offset a return to growth in Germany.
"The weakness overseas really spooked things, and that's what's directing the ball right now," said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.
There were some bright spots, too, as new orders drove the pace of U.S. manufacturing growth to its quickest in more than a year and a half in February, according to the Institute for Supply Management.
In addition, U.S. consumer sentiment rose more than expected in February, the final Thomson Reuters/University of Michigan sentiment index showed.
Investors were also looking ahead to U.S. government budget cuts that were widely expected to take effect at the end of the day, barring an unlikely last-minute deal. The International Monetary Fund has said that if the cuts take effect, it would reevaluate growth forecasts for the U.S.
The Dow Jones industrial average was down 44.93 points, or 0.32 percent, at 14,009.56. The Standard & Poor's 500 Index was down 6.20 points, or 0.41 percent, at 1,508.48. The Nasdaq Composite Index was down 17.89 points, or 0.57 percent, at 3,142.30.
For the week, the Dow is up less than 0.1 percent while the Nasdaq is off 0.6 percent and the S&P is off 0.4 percent in its worst weekly performance this year.
Equities have been on a tear lately, rising for four straight months to approach five-year highs, while the Dow is now about 1 percent away from its all-time intraday high of 14,198.10. Declines have been shallow or short-lived, with investors jumping in to seek value on any dips.
In addition to concerns about economic growth, "there are also jitters with the Dow at the doorstep of all-time highs," said PNC's Stone, who helps oversee $115 billion in assets. "Given the speed of the advance we've seen, there's plenty of room for a pullback."
The equity market gains have come on the back of strong corporate earnings and an accommodative Federal Reserve. In that environment, many investors have shrugged off the potential impact of the sequester, $85 billion in spending cuts across federal government agencies that economists expect will shave half a percentage point off U.S. economic growth.
Cyclical companies such as banks and materials stocks, which are closely tied to the pace of economic growth, are likely to be among the hardest hit in the short term. Morgan Stanley fell 0.8 percent to $22.37. Chevron Corp slid 0.7 percent to $116.32.
Groupon Inc surged 4 percent to $4.71, a day after the online coupon company fired its chief executive officer in the wake of weak quarterly results.
Gap Inc rose 3.1 percent to $33.97 after reporting fourth-quarter earnings that beat expectations and boosting its dividend by 20 percent, while Salesforce.com Inc posted sales that beat forecasts, sending shares up 5.9 percent to $179.