* Dudley: 4 rate hikes this year in line with "gradual" message
* Trump announcement on tariffs raises trade war fears
* Steel stocks jump
* Indexes down: Dow 0.01 pct, S&P 0.02 pct, Nasdaq 0.09 pct (Updates to early afternoon)
By Sruthi Shankar and Caroline Valetkevitch
March 1 (Reuters) - U.S. stocks fell sharply on Thursday after President Donald Trump said the United States would impose import tariffs on steel and aluminum, adding fears of a tit-for-tat trade war to growing worries about higher interest rates.
After a confused day of report and counter report, Trump said the U.S. would impose tariffs of 25 percent on steel imports and 10 percent on imported aluminum next week.
That drove shares in U.S. steel producers as much as 12 percent higher but knocked 2 percent or more off heavyweights like Boeing and Caterpillar, who investors worried would face higher raw material costs and trade barriers elsewhere.
New York Federal Reserve President William Dudley also added to the evidence that the U.S. central bank under new chief Jerome Powell would seek to tighten monetary policy with four interest rates rises this year, more than previously expected.
By 13:09 p.m. ET, all the major sectors in the S&P 500 were down in response along with 29 of the 30 components of the Dow Industrial Average.
Overall the Dow lost 343.7 points, or 1.4 percent, the S&P 500 29.03 points, or 1.1 percent and the Nasdaq Composite 77.10 points, or 1.1 percent.
"The bombshell is the announcement about half an hour ago about the proposed tariffs on steel and aluminum industries," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
"It's helping about a dozen stocks in those industries but has raised the specter of trade wars, and trade wars don't help the stock market."
Federal Reserve chair Jerome Powell had earlier given the market a boost by saying in his second round of congressional testimony that the central bank did not see strong evidence of wage inflation or signs of overheating.
Rising inflation and bond yields were the main concerns as Wall Street ended a turbulent February on Wednesday, with the S&P 500 posting its first monthly loss in 11 months.
But it was the tariff issues that was spinning the market lower as the afternoon wore on.
"The risk to imparting these tariffs is that it invites a retaliatory response from our trading partners and particularly China," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. (Additional reporting by Parikshit Mishra in Bengaluru Editing by Patrick Graham)