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GLOBAL MARKETS-Dow, S&P 500 drop as dollar rises, yield curve flattens

* Italy relief does not last long for European stocks

* Chinese stocks enjoy best day in three years

* Investors eye U.S. earnings reports

* Sterling slips on Brexit nerves (Updates after U.S. open, adds commentary, changes byline, previous dateline LONDON)

By Sinéad Carew

NEW YORK, Oct 22 (Reuters) - U.S. stocks were slightly lower in choppy trade on Monday while the dollar strengthened and the U.S. yield curve flattened after European equities reversed earlier gains to close lower.

U.S. futures had pointed to gains, but the major indexes turned negative soon after Wall Street opened and then oscillated throughout the morning. Asian stocks rose after China promised to stabilize its economy and offset the impact of U.S. tariffs.

The U.S. dollar rose as the British pound fell on news that Brexit negotiations with the European Union over Northern Ireland remain in flux and as the euro continued its slide on political uncertainty over Italy's budget.

Financial stocks were the biggest drag on the S&P 500 while the U.S. Treasury yield curve flattened to its lowest level in more than two weeks before the Treasury Department was due to sell $108 billion in new short- and intermediate-dated debt. Two-year yields rose to their highest levels in a decade.

"We're still in a corrective mode and that hasn't changed. What's starting to worry me is that bonds are outperforming stocks and have been doing so since July," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, referring to the iShares 7-10-year Treasury ETF.

The Dow Jones Industrial Average fell 181.01 points, or 0.71 percent, to 25,263.33, the S&P 500 lost 13.55 points, or 0.49 percent, to 2,754.23 and the Nasdaq Composite added 15.13 points, or 0.2 percent, to 7,464.15.

After rising as much as 0.7 percent earlier in the day European stocks closed down 0.3 percent as relief over Moody's decision to keep Italy's sovereign rating outlook stable was short-lived and the focus turned to Europe's response to Rome's budget plans.

In China, Shanghai blue chips had gained 4.3 percent, in their biggest one-day gain since November 2015, after Beijing promised stimulus support for stock markets in the world's second-largest economy.

Chad Morganlander, senior portfolio manager at Washington Crossing Advisors in Florham Park, New Jersey, pointed to several areas of investor concern including earnings growth, dollar strength, commodity prices, Italy's budget and China.

"There are several factors contributing," he said.

U.S. EARNINGS

Investors also looked ahead to the peak week for the U.S. earnings season, with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting.

Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22 percent in the third quarter, according to I/B/E/S data from Refinitiv.

But analysts at JPMorgan in a research note cited headwinds including "U.S. dollar strength, supply chain disruptions owing to all the trade uncertainty, and rising costs."

The dollar index rose 0.32 percent, with the euro down 0.44 percent to $1.1462.

Sterling, meanwhile, slipped 0.7 percent against the dollar as fears grew that the Irish border issue and other disputes over Brexit would see British Prime Minister Theresa May face a serious challenge to her leadership.

Benchmark 10-year notes last rose 3/32 in price to yield 3.1921 percent, from 3.202 percent late on Friday.

Oil trading was also choppy, with U.S. crude rising 0.03 percent to $69.30 per barrel and Brent last up 0.05 percent to $79.82.

Spot gold dropped 0.4 percent to $1,220.80 an ounce.

(Additional reporting by April Joyner, Kate Duguid in New York, Karin Strohecker, Tom Wilson, Abhinav Ramnarayan in London and Wayne Cole in Sydney Editing by Andrew Heavens and Paul Simao)

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