By Noel Randewich

SAN FRANCISCO (Reuters) - Technology stocks including Facebook (FB.O), Microsoft (MSFT.O) and Alphabet (GOOGL.O) dropped sharply on Monday, increasing worries that the top-performing sector is falling out of favor as investors look elsewhere for cheaper opportunities.

Facebook fell 4.6 percent, on track for its worst day in nearly a year and eliminating over $20 billion of its market value, while Microsoft, Apple (AAPL.O) and Alphabet each lost more than 1 percent.

Those stocks have helped push the S&P 500 information technology index (.SPLRCT) 23 percent higher in 2017, making it the top performer among the S&P 500's main sectors.

Underscoring growing concerns about a shift in investor focus, a quarter of the 68 stocks in that technology index have seen recent drops of 10 percent or more, which many on Wall Street define as a correction.

"There's definitely some panic out there," said Wedbush trader Joel Kulina. "Everyone is talking about rotation, it's becoming one of those buzzwords."

Apple approached correction territory as investors fretted about demand for its newest iPhones.

Trading in a range around 18.4 times expected earnings, the S&P 500 information technology index is near its highest since before the 2008 financial crisis, according to Thomson Reuters Datastream.

"I think we're seeing more of a rotation out of some hot-flying tech names into small-caps, some of the names that may well benefit from tax cuts," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

Underperforming the broader market so far in 2017, the S&P 600 small-cap index on Monday was up 0.17 percent and on track to close at a record high.

Investors dumped recent tech favorites including Nvidia (NVDA.O), down 4.04 percent, and Applied Materials (AMAT.O), which lost 3.47 percent.

Videogame makers were also hard hit: Activision Blizzard (ATVI.O) and Electronic Arts (EA.O) both lost more than 3 percent.

Stirring investor pessimism, Facebook is grappling with how to handle paid political advertisements following threats by U.S. lawmakers to regulate the world's largest social network over secretive ads that run during election campaigns.

Netflix (NFLX.O) lost 5 percent, giving back some of its 43-percent rally in 2017 that valued the stock at 103 times expected earnings.

“Any time we get a bit of profit-taking in technology there's a bit of a follow-on trade, a bit of a herd trade, people look at it and see a place to take profits and rebalance their portfolio into other areas,” said Jason Ware, chief investment officer at Albion Financial in Salt lake City, Utah.

(Additional reporting by Chuck Mikolajczak and Rodrigo Campos in New York, aeporting by Noel Randewich; Editing by Susan Thomas)