* Major indexes down over 6% in May
* U.S. Treasury yield curve inversion deepens
* 8 sectors drop more than 1%
* Dow down 1.41%, S&P 500 down 1.32%, Nasdaq down 1.51% (New throughout, updates prices, market activity and comments, new byline)
By Chuck Mikolajczak
NEW YORK, May 31 (Reuters) - U.S. stocks dropped on Friday, as the S&P 500 closed out the month with its biggest May slump since 2010, after President Donald Trump's surprise threat of tariffs on Mexico fueled fears that a trade war on multiple fronts could lead to a recession.
Washington will impose a 5% tariff from June 10, which would rise steadily to 25% until illegal immigration across the southern border was stopped, Trump tweeted late on Thursday.
Mexican President Andres Manuel Lopez Obrador responded by urging his U.S. counterpart to back down.
"It really is applying a trade tariff to a national security issue and that is different," said Christopher Smart, head of Barings Investment Institute in Boston.
"That is the issue and now what country is not vulnerable to tariffs or what political, diplomatic or national security issue won’t now include the threat of tariffs to resolve. So if you are an investor this is a significantly different world."
The Dow Jones Industrial Average fell 354.84 points, or 1.41%, to 24,815.04, the S&P 500 lost 36.8 points, or 1.32%, to 2,752.06 and the Nasdaq Composite dropped 114.57 points, or 1.51%, to 7,453.15.
Both the S&P 500 and Nasdaq closed below their 200-day moving averages for the first time since March 8, seen as a strong technical support level that could presage further losses.
For the week, the Dow fell 3.01%, the S&P 500 dropped 2.62%, the Nasdaq declined 2.41%. The weekly decline was the sixth straight for the Dow, its longest weekly losing streak since 2011. For the month, the Dow fell 6.69%, the S&P 500 dropped 6.58%, the Nasdaq declined 7.93% to mark the first monthly decline of the year for each index.
Investors have grown more worried about deteriorating trade talks between the U.S. and China and have sought safety in government bonds. Technology and energy have been among the hardest hit sectors since May 3 as Trump ramped up tariff threats with Beijing.
U.S. Treasury yields fell to new multi-month lows. Benchmark 10-year yields dropped as low as 2.128 percent, the lowest since September 2017.
The yield curve, as measured in the gap between three-month and 10-year bond yields, remained deeply inverted. Some investors view this as a sign a recession is likely in one to two years.
Of the 11 major S&P sectors, only defensive plays utilities and real estate were on the plus side while eight were showing drops of more than 1%.
U.S. carmakers and manufacturers were also pulled lower. General Motors Co dropped 4.25% and Ford Motor Co 2.26%, pushing the consumer discretionary sector down 1.44%.
Adding to the downbeat mood, Beijing warned on Friday that it would unveil an unprecedented hit-list of "unreliable" foreign firms, as a slate of retaliatory tariffs on imported U.S. goods was set to kick in at midnight. Tariff-sensitive industrials declined 1.46%.
Data showed U.S. consumer prices in April increased by the most in 15 months, but a cooling in spending pointed to a slowdown in economic growth that could moderate inflation pressures.
Among other stocks, Gap Inc tumbled 9.32% as the worst performer on the S&P 500 after the apparel retailer cut its 2019 profit forecast.
Constellation Brands, which has substantial brewery operations in Mexico, slid 5.79%.
Declining issues outnumbered advancers on the NYSE by a 2.52-to-1 ratio; on Nasdaq, a 3.20-to-1 ratio favored decliners.
The S&P 500 posted four new 52-week highs and 52 new lows; the Nasdaq Composite recorded 12 new highs and 210 new lows.
About 7.75 billion shares changed hands in U.S. exchanges, compared with the 7.01 billion daily average over the last 20 sessions.
Reporting by Chuck Mikolajczak Editing by Chizu Nomiyama and David Gregorio