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* Banks slide after Moody's downgrades 10 mid-sized banks

* Drugmakers up after positive data from Novo's obesity drug study

* UPS falls after cutting annual revenue view on lower demand

Aug 8 (Reuters) -

U.S. stocks closed lower on Tuesday in a broad sell-off after the downgrading of several lenders by credit rating agency Moody's reignited fears about the health of U.S. banks and the economy.

After a five-month rally pushed the benchmark S&P 500 and Nasdaq Composite within 5% of their lifetime highs, August has now recorded five losing sessions out of six.

Tuesday's decline was triggered after

the agency cut ratings on 10 small- to mid-sized lenders by one notch and placed six banking giants, including Bank of New York Mellon, U.S. Bancorp, State Street and Truist Financial, on review for potential downgrades.

Moody's also warned that the sector's credit strength would likely be tested by funding risks and weaker profitability.

Market confidence in U.S. banks has been gradually returning after the failures of three lenders earlier this year, including Silicon Valley Bank, shocked the financial system.

The S&P 500 Banks index remained weaker year to date, despite steady gains by the benchmark S&P 500 index , and the downgrades exposed the fragility of investors' confidence towards financial stocks.

The banks index slid on Tuesday, as did the KBW Regional Banking index.

Big banks Goldman Sachs and Bank of America eased, while Bank of New York Mellon and Truist were also down.

Jason Pride, chief of investment strategy and research at Glenmede, noted that Moody's downgrades, as well as the notice given to larger banks about possible future action, were a public statement about the agency's concerns for the health of the banking system, and this affects the wider economy.

"I think it's a big deal in the bigger picture of how the economy operates, because regional banks' lending is one of the main lubricants of the economy," he said.

"If it slows down, the engine just doesn't work as well."

Reaction to the bank downgrades pushed up the CBOE Market Volatility index, Wall Street's fear gauge, at one point hitting a two-month high.

According to preliminary data, the S&P 500 lost 19.04 points, or 0.42%, to end at 4,499.40 points, while the Nasdaq Composite lost 109.63 points, or 0.78%, to 13,885.33. The Dow Jones Industrial Average fell 158.58 points, or 0.45%, to 35,314.55.

Most of the 11 major S&P 500 sectors fell. While financials was, understandably, one of the biggest decliners, materials and technology also weighed heavily.

The energy index was among the worst performers in early trading, as crude prices fell after disappointing trade data from top-consumer China. However, as oil turned positive into the afternoon, aided by a U.S. government agency projecting a rosier outlook on the economy, this helped the index reverse course and end higher.

Healthcare shares also advanced.

Drugmakers globally rose after Denmark-based Novo Nordisk said its obesity drug, Wegovy, reduced the risk of heart disease.

Eli Lilly surged after the pharmaceutical firm posted upbeat quarterly profits.

Dish Network jumped as the pay-TV provider disclosed plans to merge with satellite communications vendor EchoStar, which also rose.

United Parcel Service slipped after the U.S. economy bellwether cut its annual revenue forecast.

(Reporting by Bansari Mayur Kamdar and Johann M Cherian in Bengaluru and David French in New York; Editing by Sriraj Kalluvila, Vinay Dwivedi and Richard Chang)