(For a live blog on the U.S. stock market, click or type LIVE/ in a news window.)
* Indexes drop: Dow 0.94%, S&P 0.73%, Nasdaq 0.42%
* U.S. 10-yr yields hit lowest levels since Oct 2016
* Nine of 11 S&P sectors down; financials hit hardest
* Disney drops 5% after earnings miss (Updates to early afternoon)
By Medha Singh
Aug 7 (Reuters) - U.S. stocks fell on Wednesday, as investors reeling from rising trade tensions fled riskier assets for perceived safer havens and the bond markets signaled a higher risk of recession.
The premium on three-month Treasury bill rates over 10-year Treasury yields, a closely watched U.S. recession indicator, was at its most elevated levels since March 2007.
The sharp drop in yields also reflected a jump in expectations that the Federal Reserve would cut key borrowing costs three more times by year-end, with markets fully pricing in a reduction in September.
"Whether the U.S. economy is strong enough to withstand the next phase of a trade war is giving people concern right now," said Mike Loewengart, vice-president of investment strategy at E*Trade Financial in New York.
The trade concerns remerged after President Donald Trump last week threatened to slap 10% levies on the rest of $300 billion of Chinese imports and called China a currency manipulator on Monday.
Central banks in New Zealand, India and Thailand on Wednesday cut rates amid growing fears that the trade war could aggravate a slowdown in the global economy.
"Central banks are trying to preemptively strike by cutting rates. They don't want to wait until after a recession because it'll be too late," said Adam Sarhan, chief executive officer of 50 Park Investments, an investment advisory service in New York.
The interest-rate sensitive S&P 500 banks sub-sector slipped 3.34%. The broader financial index dropped 2.18%, the most among nine of the 11 major S&P sectors trading lower.
The energy sector shed 1.75% as oil prices slid more than 3% on demand concerns.
At 12:46 p.m. ET, the Dow Jones Industrial Average was down 243.45 points, or 0.94%, at 25,786.07, easing from a near 600 point drop.
The S&P 500 was down 20.97 points, or 0.73%, at 2,860.80 while the Nasdaq Composite was down 33.21 points, or 0.42%, at 7,800.06.
The benchmark S&P 500 is now about 6% away from its all-time high it hit last month and on pace to drop for the seventh time in the last eight sessions.
Walt Disney Co dropped 5% after its quarterly earnings missed analysts' forecast on higher investments in its streaming platform.
CVS Health Corp climbed 5.7% after the drugstore chain raised its full-year profit forecast.
Declining issues outnumbered advancers for a 1.88-to-1 ratio on the NYSE and for a 1.68-to-1 ratio on the Nasdaq.
The S&P index recorded five new 52-week highs and 30 new lows, while the Nasdaq recorded 25 new highs and 176 new lows. (Reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Anil D'Silva and Sriraj Kalluvila)