* Citigroup shares slump after Fed rejects capital plan
* GDP grew 2.6 pct in Q4; jobless claims unexpectedly drop
* Dow off 0.2 pct; S&P off 0.4 pct; Nasdaq off 0.8 pct
(Updates to late afternoon trade)
NEW YORK, March 27 (Reuters) - U.S. stocks extended losses in late afternoon trading on Thursday, erasing S&P 500's year-to-date gain, as banks and technology stocks led the decline.
The benchmark S&P 500 was now flat for the year after falling more than 1 percent this week as many of the market's biggest trading favorites lost their momentum.
Markets were pressured by a steep drop in Citigroup Inc shares, which suffered their biggest daily decline since November 2012, after the Federal Reserve rejected the bank's capital plan. The S&P financial index lost 0.9 percent and was the worst-performing sector.
The tech-heavy Nasdaq was once again underperforming the broader market. The Nasdaq Biotechnology Index fell 0.3 percent, extending its weekly loss to nearly 5 percent.
But the S&P 500 managed to hold above the 1,840 level, which has recently acted as support, as the end of the quarter approached and money managers engaged in "window dressing," adjusting positions to improve the look of their portfolios.
"The market has been given plenty of reasons to sharply sell off, and it does not seem as though there is that spirit to do it. Clearly, we are coming to the end of the quarter and no one is particularly interested in marking the book down," said Peter Kenny, chief executive officer of Clearpool Group in New York.
The Dow Jones industrial average fell 33.81 points or 0.21 percent, to 16,235.18, the S&P 500 lost 7.05 points or 0.38 percent, to 1,845.51 and the Nasdaq Composite dropped 33.942 points or 0.81 percent, to 4,139.637.
Citigroup tumbled 5.5 percent to $47.40 a day after the Fed rejected the bank's plan to buy back $6.4 billion in shares and boost dividends, saying it wasn't sufficiently prepared to handle a potential financial crisis. A source close to the matter told Reuters that Citi officials had not expected the rejection.
The Fed also rejected Zions Bancorp's plan late on Wednesday. Shares of Zions Bancorp slid 1.2 percent to $29.85 on Thursday.
Big tech names were down, including Google Inc, off 1.6 percent at $1,112.78, Microsoft down 0.8 percent at $39.45, and Amazon.com down 2.1 percent to $335.99.
Data showed the U.S. economy grew a bit faster than previously estimated in the fourth quarter, while new claims for jobless aid dropped to a near four-month low last week. But contracts to buy previously owned homes fell in February to their lowest level since October 2011.
The United States and the European Union on Wednesday agreed to prepare possibly tougher economic sanctions in response to Russia's annexation of Ukraine's Crimea territory.
While Western leaders had said earlier that they would hold off on new sanctions unless Moscow takes further destabilizing actions in the region - which Russian President Vladimir Putin last week said he wasn't interested in doing - investors are concerned about the potential fallout of a prolonged conflict.
Concerns about the effect of sanctions on Russia's energy sector and global supplies helped push crude oil prices and the S&P energy index higher. In addition, Exxon Mobil Corp gained 1.5 percent to $96.16 after Bank of America Merrill Lynch boosted its rating on the stock to "buy."
(Editing by Nick Zieminski)