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* U.S. factory sector shrinks for first time since 2016
* Tech stocks weigh most on S&P 500
* Boeing off on fears of more delays to 737 MAX return
* Indexes fall: Dow 1.37%, S&P 500 0.85%, Nasdaq 0.98% (Updates prices, adds comments)
By Uday Sampath Kumar
Sept 3 (Reuters) - U.S. stocks fell on Tuesday as data showed factory activity contracted for the first time since 2016 in August, renewing fears that a drawn-out trade war between the United States and China could tip the world's largest economy into recession.
The Institute for Supply Management said its index of national factory activity decreased to 49.1, compared with a reading of 51.1 estimated by analysts polled by Reuters.
The weak data also weighed on U.S. Treasury yields, with the benchmark 10-year yield falling to its lowest since July 2016. Shares of banks, which typically come under pressure in a low interest rate environment, slid 2.1%.
"A contraction in the manufacturing sector, which we haven't seen for a very long time, is important because it has a tendency to be a leading indicator for the rest of the economy including the services sector," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin.
"The signals (for a recession) have been lining up and this is one of them," Frederick said, adding that a downturn by late next year is "very realistic."
U.S. stocks opened lower as the lack of progress on negotiations between Washington and Beijing amid a new round of tariffs kicking in over the weekend weighed on sentiment.
The United States on Sunday began imposing 15% tariffs on a variety of Chinese goods, and China began imposing new duties on U.S. crude oil.
The energy sector tumbled 1.7%, as rising OPEC and Russian crude output also drove a slump in oil prices.
Trade-sensitive industrials slipped 1.7%, while technology stocks fell 1.2%.
Chipmakers, which draw a large portion of their revenue from China, also fell, with the Philadelphia Semiconductor index down 1.9%.
The S&P 500 index fell 1.8% in August, its biggest monthly drop since May, after escalating trade tensions and the inversion of a key part of the U.S. yield curve, seen as a sign of recession, drove investors toward safe-haven assets.
However, trade tensions were dialed down last week following signals that Beijing and Washington would meet in September for talks, but Bloomberg reported on Monday that the two sides were struggling to agree on a date for the planned meeting.
At 11:23 a.m. ET the Dow Jones Industrial Average was down 361.35 points, or 1.37%, at 26,041.93 and the S&P 500 was down 24.80 points, or 0.85%, at 2,901.66.
The Nasdaq Composite was down 78.11 points, or 0.98%, at 7,884.78.
Weighing the most on the Dow were shares of Boeing Co , which tumbled 3.4% after the Federal Aviation Administration said on Friday a global panel of experts will need a few more weeks to finish its review into the company's 737 MAX certification.
U.S. casino operators felt the brunt of slowing economic growth in China as gambling hub Macau posted weak August casino revenue. Shares of Wynn Resorts Ltd, Las Vegas Sands Corp and MGM Resorts International fell between 2.4% and 4.5%.
Among few gainers were the defensive utilities, real estate and consumer staples sectors.
Declining issues outnumbered advancers for a 2.10-to-1 ratio on the NYSE and for a 2.80-to-1 ratio on the Nasdaq.
The S&P index recorded 33 new 52-week highs and eight new lows, while the Nasdaq recorded 35 new highs and 103 new lows. (Reporting by Uday Sampath and Shreyashi Sanyal in Bengaluru; Editing by Anil D'Silva and Arun Koyyur)