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* Financials fall most among 11 major S&P sectors
* J&J up after opioid lawsuit decision, lifts healthcare
* Smucker falls as forecast cut, earnings disappoint
* Indexes: Dow & S&P 500 flat, Nasdaq off 0.04% (Updates prices, comments)
By Akanksha Rana
Aug 27 (Reuters) - Wall Street treaded water on Tuesday, as a drop in financials and renewed concerns about a U.S. recession offset early optimism about hopes of a resolution to the protracted trade war with China.
U.S. stocks were up strongly earlier in the session, building on gains from Monday after U.S. President Donald Trump sought to ease tensions by predicting another round of talks with Beijing. China's foreign ministry, however, reiterated on Tuesday that it had not received any recent telephone call from the United States on trade.
Investor sentiment soured after the inversion in U.S. Treasury yield curve deepened further and the benchmark 10-year yields slipped, underscoring safe-haven demand and worries about a softening global economy.
"There's a lot of concern about what's going on here and as much as the investors try and ignore it and accept the idea that the economy remains strong, the doubts seem to creep into this market," said Rick Meckler, partner, Cherry Lane Investments.
"People are still concerned about the trade war with China and the inconsistencies in a lot of the administration's comments."
The interest-rate sensitive financials sector slid 0.47%, weighing the most among all major S&P 500 sectors.
An escalation in the trade tensions between Washington and Beijing has hit financial markets in the recent days after both sides threatened to slap tariffs on each other's goods worth billions of dollars.
Wall Street has been fretting over a deepening trade row hurting corporate profits, worries of slowing global growth, and the lack of clarity on the pace of U.S. rate cuts have only added to the woes.
With the next Federal Reserve meeting scheduled for September, investors are gauging the strength of the U.S. economy for clues on where rates are headed.
The Dow Jones Industrial Average fell 2.76 points, or 0.01%, to 25,896.07, the S&P 500 gained 0.88 points, or 0.03%, to 2,879.26 and the Nasdaq Composite dropped 2.82 points, or 0.04%, to 7,850.92.
Offering markets support was a 0.23% rise in the healthcare sector, powered by gains in Johnson & Johnson.
Shares in the drugmaker rose 2.22% after an Oklahoma judge said J&J must pay $572.1 million for its part in fueling the U.S. opioid epidemic, a sum that was substantially less than what investors had expected.
Philip Morris International Inc shares dropped 3.6%, after the tobacco maker said it is in talks with Altria Group Inc to combine in an all-stock merger of equals. Altria's shares were off 1.1%.
Shares in J. M. Smucker Co tumbled 9.3% after the packaged food maker cut its full-year earnings forecast and missed estimates for quarterly profit and sales.
Declining issues outnumbered advancers for a 1.20-to-1 ratio on the NYSE and a 1.82-to-1 ratio on the Nasdaq.
The S&P index recorded 25 new 52-week highs and 15 new lows, while the Nasdaq recorded 33 new highs and 123 new lows. (Reporting by Akanksha Rana and Shreyashi Sanyal in Bengaluru; Editing by Shounak Dasgupta)