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* March U.S. manufacturing data misses estimates
* U.S. Treasury yield curve inverts
* S&P 500, Dow set to post weekly losses
* Banks on course for worst week since December
* Indexes fall: Dow 1.32 pct, S&P 1.42 pct, Nasdaq 1.94 pct (Updates to late afternoon, adds NEW YORK dateline, byline)
By Stephen Culp
NEW YORK, March 22 (Reuters) - Wall Street stocks sold off sharply on Friday, with all three major U.S. stock indexes dropping between 1 and 2 percent as weak factory data from the United States and Europe led to an inversion of U.S. Treasury yields, fueling fears of a global economic downturn.
Capping a tumultuous week of trading, the S&P 500 and the Dow were set to post losses, while the Nasdaq was on track to eke out a nominal weekly gain.
A weaker-than-expected Markit PMI reading of U.S. factory activity in March, along with similarly dour reports from Europe and Japan, helped send U.S. Treasury yields into an inversion, with the spread between yields of three-month Treasury bills exceeding those of 10-year notes for the first time since 2007.
An indication of near-term risk, and seen by many as a potential harbinger of recession, the inverted Treasury yield curve seemed to confirm investor fears of a global slowdown in economic growth.
"It is definitely a warning sign," said Peter Kenny, founder of Kenny's Commentary LLC and Strategic Board Solutions LLC, in New York. "The historical narrative behind that inversion is significant. It has very oftentimes indicated there is a significant economic slowdown on the horizon."
Earlier in the week, the U.S. Federal Reserve concluded its two-day monetary policy meeting with a statement that forecast no additional interest rate hikes in 2019 on signs of economic softness, a dovish shift that surprised the markets.
Interest rate-sensitive financial firms were down 2.2 percent, on course for their worst week since the late-December sell-off.
The Dow Jones Industrial Average fell 298.58 points, or 1.15 percent, to 25,663.93, the S&P 500 lost 37.14 points, or 1.30 percent, to 2,817.74 and the Nasdaq Composite dropped 144.64 points, or 1.85 percent, to 7,694.32.
Of the 11 major sectors in the S&P 500, all but defensive utilities and consumer staples were in the red.
The CBOE Volatility Index a gauge of investor anxiety, jumped the most in two months.
Nike Inc shares dipped 5.8 percent after the sportswear company's North American sales fell short of estimates.
Luxury retailer Tiffany Inc said it expected earnings growth to resume in the second half of the year and affirmed its fiscal 2019 targets, sending its shares up 3.7 percent.
Electric automaker Tesla Inc was down 2.6 percent following a research note from Cowen that saw soft U.S. demand for the Model 3 until the release of the company's lower-priced model in the second quarter.
Boeing Co continued to lose altitude, falling -1.6 percent as Indonesian airline Garude canceled a $6 billion order for the company's 737 MAX planes, citing customer fear in the wake of the Ethiopian Airlines crash.
The plane maker's shares have shed more than 13 percent of their value since the March 10 disaster.
Netflix Inc sank 3.4 percent on the eve of Apple Inc's launch of a rival streaming service on Monday.
Declining issues outnumbered advancing ones on the NYSE by a 3.63-to-1 ratio; on Nasdaq, a 5.45-to-1 ratio favored decliners.
The S&P 500 posted 54 new 52-week highs and 5 new lows; the Nasdaq Composite recorded 23 new highs and 76 new lows. (Reporting by Stephen Culp; Editing by Dan Grebler)