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US STOCKS-Indexes drop after Walmart profit warning; Nasdaq down 2%

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(For a Reuters live blog on U.S., UK and European stock markets, click or type LIVE/ in a news window.)

* Walmart cuts profit forecast; news hits retailers

* McDonald's up as sales, profit top estimates

* Coca-Cola up on forecast raise

* Indexes down: Dow 0.8%, S&P 500 1.3%, Nasdaq 2% (New throughout, updates prices, market activity and comments to afternoon trading; changes byline, adds dateline)

By Caroline Valetkevitch

NEW YORK, July 26 (Reuters) - U.S. stocks were sharply lower on Tuesday afternoon, with Nasdaq down more than 2%, as a profit warning by Walmart dragged down retail shares and fueled fears about consumer spending.

Walmart shares fell 8% after the retailer cut its full-year profit forecast late on Monday. Walmart blamed surging prices for food and fuel, and said it needed to cut prices to pare inventories.

Shares of Target Corp declined 3.8% and Amazon.com Inc dropped 5.1%.

Also, Amazon said it would raise fees for delivery and streaming service Prime in Europe by up to 43% a year.

Amazon was among the biggest drags on the Nasdaq and S&P 500, while consumer discretionary fell more than 3% and led declines among S&P 500 sectors.

"The majority of companies that reported today beat earnings, and that's been the case. But of course there have been some warnings, and that's what the market is focusing on," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"Walmart basically pulled the plug, and most retailers are lower across the board."

Meanwhile, Coca-Cola Co gained 1.9% after the company raised its full-year revenue forecast. McDonald's Corp rose 3% after beating quarterly expectations.

A busy week for earnings includes reports from Alphabet Inc and Microsoft Corp after the bell. Microsoft was down 3.4% and Alphabet was down 2.9%.

The Dow Jones Industrial Average fell 239.66 points, or 0.75%, to 31,750.38, the S&P 500 lost 52.28 points, or 1.32%, to 3,914.56 and the Nasdaq Composite dropped 239.38 points, or 2.03%, to 11,543.29.

The Federal Reserve started a two-day meeting and on Wednesday, it is expected to announce a 0.75 percentage point interest rate hike to fight inflation. Investors have worried that aggressive interest rate hikes by the Fed could tip the economy into recession.

Earnings from S&P 500 companies are expected to have risen 6.2% for the second quarter from the year-ago period, according to Refinitiv data.

Among the week's heavy slate of economic news, data Tuesday showed U.S. consumer confidence dropped to nearly a 1-1/2-year low in July, pointing to slower economic growth at the start of the third quarter.

Advance second-quarter GDP data on Thursday is likely to be negative after the U.S. economy contracted in the first three months of the year.

Declining issues outnumbered advancing ones on the NYSE by a 1.82-to-1 ratio; on Nasdaq, a 1.51-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 30 new lows; the Nasdaq Composite recorded 32 new highs and 123 new lows. (Additional reporting by Shreyashi Sanyal and Aniruddha Ghosh in Bengaluru; Editing by Arun Koyyur, Anil D'Silva and David Gregorio)