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* Stock market to be shut for Labor day on Monday
* Ulta Beauty tumbles on full-year forecast cut
* U.S. consumer spending increases strongly
* Dow up 0.16%, S&P flat, Nasdaq off 0.37% (Updates to early afternoon)
By Akanksha Rana and Shreyashi Sanyal
Aug 30 (Reuters) - U.S. stocks lost steam in afternoon trading on Friday as investors moved to the sidelines ahead of a long Labor day weekend but the three major indexes were on course to wrap up the week with their biggest gains since June.
Despite the gains, Wall Street was set for its worst month since May after escalations in U.S.-China trade tensions and fears of a risk of recessions, underscored by the inversion of a key part of the U.S. yield curve, triggered bouts of selloff in August.
Markets were higher earlier in the day after data showed strong U.S. consumer spending in July and on signals that Washington and Beijing would resume trade talks.
With analysts saying investors were taking money off the table ahead of the holiday, by midday only the Dow Jones Industrial Average was clearly in positive territory.
"Frankly, markets have been overly optimistic about trade," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin.
"I would caution people to be a little careful because optimism won't last if it doesn't ultimately materialize into something substantive like an agreement, which I just have a hard time seeing it happen."
Markets are also bracing for a new round of U.S. tariffs on some Chinese goods that come into effect on Sunday and the technology sector was the biggest weight on the S&P with a 0.3% loss.
Ulta Beauty Inc tumbled 28.8%, to the bottom of the S&P 500, after the cosmetics company cut its full-year profit forecast.
At 01:09 p.m. ET, the Dow Jones Industrial Average was up 41.07 points, or 0.16%, at 26,403.32, the S&P 500 was up 0.44 points, or 0.02%, at 2,925.02. The Nasdaq Composite was down 29.77 points, or 0.37%, at 7,943.62.
Hopes that the Federal Reserve would step in to arrest any slowdown in economic growth as a result of the trade war have led traders to fully price in an interest rate cut at the next meeting of the U.S. central bank in mid-September.
Investors will also keep a close watch on the monthly jobs report and manufacturing data next week for clues on the health of the U.S. economy.
The biggest gainer on the benchmark index was Campbell Soup Co, which jumped 7.80% after its quarterly profit beat estimates.
Advancing issues outnumbered decliners by a 1.30-to-1 ratio on the NYSE. Declining issues outnumbered advancers for a 1.06-to-1 ratio on the Nasdaq.
The S&P index recorded 36 new 52-week highs and no new low, while the Nasdaq recorded 33 new highs and 44 new lows. (Reporting by Akanksha Rana and Shreyasi Sanyal in Bengaluru; Editing by Anil D'Silva)