* Markets on edge before July 6 China tariff deadline
* Dell gains on deal to buy out VMware tracking stock
* Tesla jumps on Model 3 milestone, then reverses course
* Strong construction, factory data help sentiment
* Indexes down: Dow 0.53 pct, S&P 0.41 pct, Nasdaq 0.26 pct (Changes comment, adds details, updates prices)
By Amy Caren Daniel
July 2 (Reuters) - U.S. stocks fell on Monday as a drop in oil prices dragged energy stocks lower, while the risk of an escalating tariff war between Washington and its trading partners continued to weigh on the broader market sentiment.
The United States' decision to impose tariffs on $34 billion worth of Chinese goods will come into effect on July 6, posing threats of a similar response from Beijing.
Meanwhile, the European Union has threatened to hit the United States with almost $300 billion in retaliatory tariffs, while Canada has vowed to slap punitive measures on $12.63 billion worth of American goods in response to U.S. steel and aluminum tariffs.
"I think it's (the market's decline) a continued reaction to the trade policy situation," said Brad McMillan, chief investment officer for Commonwealth Financial.
"We see the United States announce certain unilateral actions, then we're starting to see some of the responses, and I think the markets are getting increasingly worried."
Nine of the 11 main S&P 500 sectors were trading lower. They were led by a 1.38 percent fall in the energy index on the back of a drop in crude prices as supplies from Saudi Arabia and Russia rose.
At 12:04 a.m. EDT the Dow Jones Industrial Average was down 128.13 points, or 0.53 percent, at 24,143.28, the S&P 500 was down 11.04 points, or 0.41 percent, at 2,707.33 and the Nasdaq Composite was down 19.18 points, or 0.26 percent, at 7,491.12.
The three major indexes however pulled back from steeper declines at the start of the session as technology stocks pared their losses and was last down 0.13 percent.
Also helping the market was Commerce Department data that showed U.S. construction spending increased 0.4 percent in May, more than estimated, amid gains in investment in private and public construction projects.
"Data came well above expectations, that says the dollar strength is not hitting U.S. manufacturers and trade at least so far," said McMillan.
Boosting the view, was the Institute for Supply Management (ISM) saying national factory activity surged last month, likely as steel and aluminum tariffs disrupted the supply chains, resulting in factories taking longer to deliver goods.
Tesla said it hit its target of producing 5,000 Model 3 sedans per week and reaffirmed its profit target. The stock, which rose as much a 6.4 percent, reversed course to trade down 1.7 percent.
Shares of Casino companies fell as gambling revenue in the Chinese territory of Macau rose less than expected in June, which Bank of America said was due to the FIFA World Cup, the fading policy stimulus and trade tension in China.
Wynn Resorts sank 7.9 percent, the most on the S&P 500. Las Vegas Sands fell 6.9 percent after Bank of America downgraded the stock. MGM Resorts dropped 2.5 percent.
Dell Technologies took a step closer to become a public company again with a deal to buy the tracking stock of its majority-owned VMware unit. The VMware tracking stock jumped 7.8 percent, while VMware jumped 9.4 percent.
Declining issues outnumbered advancers for a 1.72-to-1 ratio on the NYSE and a 1.37-to-1 ratio on the Nasdaq.
The S&P index recorded one new 52-week highs and 11 new lows, while the Nasdaq recorded 31 new highs and 48 new lows. (Reporting by Amy Caren Daniel in Bengaluru; Editing by Arun Koyyur)