* JP Morgan, Wells Fargo shares fall after results
* Retail sales unexpectedly drop
* Investors lock in gains after record highs
* Indexes down: Dow 0.3 pct, S&P 0.6 pct, Nasdaq 0.6 pct
By Angela Moon
NEW YORK, April 12 (Reuters) - U.S. stocks fell on Friday from the previous session's record levels after an unexpected drop in retail sales last month and lackluster results from two major banks.
The rally that has taken the S&P 500 index more than 11 percent higher this year has made stocks vulnerable to a pullback.
"It's not surprising to see profit-taking here going into the weekend, especially after the run we had this week," said JJ Kinahan, chief derivatives strategist at TD Ameritrade in Chicago.
The CBOE volatility index VIX, Wall Street's so-called fear gauge, rose 4 percent to 12.73. For the year, the Dow has gained more than 13 percent and the Nasdaq is up 8.7 percent.
"With the S&P 500 flirting at 1,600 level, it would be very difficult for companies to blow away the market with earnings. The cautious outlook, that we are going to soon see a selloff, is well reflected in the jump in VIX," Kinahan said.
JP Morgan Chase and Wells Fargo were the biggest companies to report so far, as earnings season got under way. Shares of both banks fell and the financial sector lost 0.9 percent.
Material and energy stocks were pressured as oil prices sank to an eight-month low as the outlook for global oil demand growth dimmed.
Among commodity related stocks, Alcoa Inc was down 1.6 percent at $8.19 and Chevron Corp fell 0.8 percent to $119.99.
The Dow Jones industrial average was down 44.20 points, or 0.30 percent, at 14,820.94. The Standard & Poor's 500 Index was down 9.56 points, or 0.60 percent, at 1,583.81. The Nasdaq Composite Index was down 18.07 points, or 0.55 percent, at 3,282.08.
But the decline still put the S&P 500 up about 2.4 percent for the week, and the Dow up about 1.8 percent and Nasdaq up about 2.4 percent.
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.
Another report showed consumer sentiment fell to a nine-month low in early April amid gloom about the long-term health prospects for the U.S. economy.
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.
The advance in equities in recent months was partly buoyed by 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.
JP Morgan reported higher first-quarter profit, though revenue declined. The bank's stock was off 0.1 percent to $49.25.
Wells Fargo's profit was better-than-expected but it made fewer home loans. Its shares were down 1.8 percent at $36.85.
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.