* U.S. factory data much weaker than expected
* VIX trades above 20 for first time since October
* Indexes down: Dow 1.71 pct, S&P 2.05 pct, Nasdaq 2.62 pct
By Chuck Mikolajczak
NEW YORK, Feb 3 (Reuters) - U.S. stocks slumped on Monday, with the S&P 500 hitting its lowest level since October after weaker-than-expected data on the factory sector in the world's largest economy provided investors with the latest reason to book profits.
U.S. manufacturing grew at a slower pace in January as new order growth plunged by the most in 33 years, while spending on construction projects barely rose in December.
Investor sentiment soured sharply after the factory data, driving the cost of protection against a drop on the S&P to its highest level in nearly four months. The CBOE volatility index jumped more than 11 percent to trade above 20 for the first time since early October.
"People realize we are at these significant levels and they start looking around and they are thinking the multiples have expanded, they are looking at the Fed tapering, they are still seeing a variety of earnings releases, and they are saying, 'let me take a little risk off,'" said Gordon Charlop, managing director at Rosenblatt Securities in New York.
"Guys are saying, 'if I can get out and some of the selling will come in behind me, maybe I can get in at advantageous (prices),' so there is a little bit of a trade in here too."
The Dow Jones industrial average fell 268.12 points or 1.71 percent, to 15,430.73, the S&P 500 lost 36.63 points or 2.05 percent, to 1,745.96 and the Nasdaq Composite dropped 107.46 points or 2.62 percent, to 3,996.418.
Selling was broad-based, with only seven components in the S&P 500 trading in positive territory. Telecoms, down 3.2 percent and consumer discretionary, down 2.6 percent, were among the worst performing sectors. The Dow Jones Transportation average dropped 3.1 percent.
Stocks were pressured late last month by concern about growth in China and as the Federal Reserve confirmed its commitment to withdrawing its market-friendly stimulus. China's service-sector growth slowed to a five-year low in another sign of stuttering momentum in the world's second-largest economy.
For January, the Dow tumbled 5.3 percent and the S&P 500 slid 3.6 percent - their worst monthly percentage declines since May 2012.
Investors were also wary about the outlook for emerging markets, where a recent rout in currencies spurred some central banks to raise interest rates or intervene in markets to limit the swings. That, in turn, has pressured bond and stock holdings and forced investors to exit in favor of assets perceived as relatively safe, like the yen and Swiss franc.
With earnings season halfway over, Thomson Reuters data shows that of the 250 companies in the S&P 500 index that have reported earnings, 69.7 percent have topped expectations, above both the 63 percent beat rate since 1994 and the 67 percent rate for the past four quarters.
Telecoms were weaker on speculation AT&T Inc's plan to cut prices on its large shared data plans could prompt other U.S. carriers, particularly larger rival Verizon Wireless , to offer new discounts. AT&T lost 3.2 percent to $32.24 and Verizon lost 3 percent to $46.58.
Charter Communications Inc is discussing raising its bid for Time Warner Cable Inc as soon as in the next two weeks, according to people familiar with the matter, a move that could pressure its reluctant rival ahead of a proxy deadline. TWC shares shed 0.6 percent to $136.20.
Britain's Smith & Nephew is to buy ArthroCare Corp for $1.7 billion in cash to strengthen its treatments for sports injuries, an area growing faster than its main replacement hips and knees business. ArthroCare shares rose 8.5 percent to $49.25.
Pfizer's shares rose 1.8 percent to $30.94 after its experimental breast cancer drug significantly delayed progression of symptoms in a mid-stage trial, meeting the study's primary goal.
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