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* Stocks on track for biggest two-day drop since November
* Initial jobless claims rise, Philly Fed well below forecasts
* VIX index above 15, euro-zone business activity disappoints
* Wal-Mart climbs after earnings, Safeway soars
* Dow off 0.4 pct, S&P 500 off 0.7 pct, Nasdaq off 1.1 pct
By Edward Krudy
NEW YORK, Feb 21 (Reuters) - U.S. stocks fell for a second day on Thursday and gauge of investor concern hit its highest in two months after reports cast doubt over the health of the U.S. and euro-zone economies.
The second day of sharp declines in equity markets put the S&P 500 on course for its worst two-day loss since November.
The CBOE Volatility Index or VIX, a measure of investor fear, jumped 6.7 percent to 15.67.
Initial claims for unemployment benefits rose more than expected last week while the Federal Reserve Bank of Philadelphia said its index of business conditions in the U.S. mid-Atlantic region fell in February to minus 12.5, the lowest in eight months.
In Europe, business activity indexes dealt a blow to hopes that the euro zone might emerge from recession soon, showing the downturn across the region's businesses unexpectedly grew worse this month.
"The PMI numbers out of Europe were really a blow to the market," said Jack De Gan, chief investment officer at Harbor Advisory in Portsmouth, New Hampshire.
"The market was expecting signs that recovery is still there, but the numbers just highlighted that the euro-zone problem is still persistent."
The abrupt reversal in markets, which started on Wednesday after minutes from the Federal Reserve's January meeting suggested stimulus measures may end earlier than thought, looks set to halt a seven-week winning streak for stocks that had lifted indexes close to all-time highs.
The Dow Jones industrial average dropped 53.87 points, or 0.39 percent, to 13,873.67. The Standard & Poor's 500 Index fell 10.30 points, or 0.68 percent, to 1,501.65. The Nasdaq Composite Index lost 35.08 points, or 1.11 percent, to 3,129.33.
The two-day decline marked the U.S. stock market's first sustained pullback this year. The Standard & Poor's 500 has fallen 2 percent over the period, but is still up 5.2 percent so far this year.
"The upside momentum in markets appears to be coming to an end as we consolidate recent gains," said Adam Sarhan, chief executive at Sarhan Capital in New York. "If the S&P breaks under its 50-day moving average, something more serious could be in store."
The S&P 500 would need to fall 1.9 percent to reach that level of 1,473.62.
Wal-Mart Stores Inc shares gained 2.1 percent to $70.66 and helped curb the Dow's decline after the world's largest retailer reported earnings that beat expectations, though early February sales were sluggish.
Wall Street will soon face another test with the upcoming debate in Washington over the automatic across-the-board spending cuts put in place as part of a larger congressional budget fight. Those cuts, set to kick in on March 1 unless lawmakers agree on an alternative, are expected to depress economic growth.
Semiconductor stocks ranked among the weakest of the day, pressuring the Nasdaq as the Philadelphia Semiconductor Index fell 2.3 percent. Intel Corp fell 2.9 percent to $20.13 while Advanced Micro Devices lost 6.7 percent to $2.53 as the S&P 500's biggest percentage decliner.
The semiconductor sector has performed well so far in 2013, rising 8.4 percent.
In other company news, shares of supermarket operator Safeway Inc jumped 12.3 percent to $22 after the company reported earnings that beat expectations.
In contrast, shares of VeriFone Systems Inc tumbled nearly 40 percent to $19.28 after the credit-card swipe machine maker forecast first- and second-quarter profits well below expectations.
Of the 427 companies in the S&P 500 that have reported results so far, 69.3 percent have exceeded analysts' expectations, compared with a 62 percent average since 1994 and 65 percent over the past four quarters, according to Thomson Reuters data through Thursday morning.
Fourth-quarter earnings for S&P 500 companies are estimated to have risen 5.9 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.
Berry Petroleum Co jumped 17.2 percent to $45.23 after oil and gas producer Linn Energy LLC said it would buy the company in an all-stock deal valued at $4.3 billion, including debt. Linn Energy shares advanced 1.9 percent to $37.36.