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* September U.S. private payrolls grow slower than expected
* E*Trade slides after Barclays double downgrades
* Activision Blizzard drops on Bernstein rating cut
* Better-than-expected profit boosts Lennar
* Futures down: Dow and S&P 0.46%, Nasdaq 0.54% (Adds comment, details, updates prices)
By Medha Singh and Arjun Panchadar
Oct 2 (Reuters) - U.S. stocks were set to fall at the open on Wednesday after the S&P 500 and Dow recorded their sharpest drop in more than a month as domestic factory activity contracted, pointing to impact from a prolonged U.S.-China trade war.
The U.S. manufacturing activity index in September hit its lowest level in more than a decade, ISM data showed on Tuesday, joining other major economies in posting a similar slowdown.
On the first day of the fourth quarter, the S&P 500 and Dow indexes wiped off their third-quarter gains as investor faith in the strength of the domestic economy, a key reason for a rally in the benchmark index this year, took a hit.
The index is now about 3% below its all-time high hit in July, after coming within striking distance of it two weeks ago.
"The weakening conditions in Europe and the slowdown in China, it's all adding up to the same thing essentially: worries that the global economy is slowing and giving investors reason to pause and take profits," said Robert Pavlik, chief investment strategist manager at SlateStone Wealth LLC in New York.
Blue-chip industrial companies Caterpillar Inc and 3M Co slipped more than 1% before the bell, leading the decliners among Dow-listed companies.
Adding to worries, the AD National Employment Report showed U.S. private employers hired fewer-than-expected workers in September and payroll gains in the prior month were revised down, pointing to a slowdown in the labor market.
Investors will be looking at the Labor Department's more comprehensive jobs report, due on Friday, for further indications on the health of the domestic economy.
The Federal Reserve, which cut interest rates for the second time this year in September, has indicated it would rely on economic data to determine future rate cuts.
Bets that the central bank would reduce borrowing costs in October have risen to 70% after the ISM data, from 39.6% on Monday, according to CME Group's Fed Watch tool. The Fed's next policy meeting will be held at the end of the month.
Other crucial factors influencing investor sentiment this month include high-level trade negotiations between the United States and China next week and third-quarter corporate earnings reports.
At 8:50 a.m. ET, Dow e-minis were down 122 points, or 0.46%. S&P 500 e-minis were down 13.5 points, or 0.46% and Nasdaq 100 e-minis were down 41.75 points, or 0.54%.
E*Trade <ETF C.O> dropped 4.4%, extending losses from the previous session, as Barclays double downgraded its shares after Charles Schwab and TAD Ameritrade <AMT D.O> eliminated commissions on online trading of stocks, ETFs, options.
Activision Blizzard Inc dropped 2.7% after Bernstein downgraded the videogame maker's shares to "market perform".
Monster Beverage Corp fell 3% after the energy drink maker's stock was downgraded by Guggenheim to "neutral."
A slide in crude prices dragged down shares of oil majors Exxon Mobil Corp and Chevron Corp more than 0.6%.
Shares in homebuilder Lennar Corp gained 2.8% after the company reported better-than-expected profit as cheaper mortgage rates led to higher demand for its homes. (Reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Arun Koyyur)