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US STOCKS-Wall St unnerved as hot inflation sparks fears of more combative Fed policy

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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.)

* Consumer price index rose to 1% in May from 0.3% in April

* Netflix falls after Goldman Sachs downgrades to "sell"

* Indexes drop: Dow 2.36%, S&P 2.66%, Nasdaq 3.35% (Adds comment, details; updates prices)

By Devik Jain and Mehnaz Yasmin

June 10 (Reuters) - U.S. stock indexes slid on Friday as consumer prices rose more than expected in May, dashing hopes that inflation is peaking and fanning worries about more aggressive steps by the Federal Reserve to tame it.

All the 11 major S&P sectors traded lower. Communication services, technology and consumer discretionary sectors declined between 2.7% and 4.1%. Financials and banks lost 3.3% and 4.2%, respectively.

The Labor Department's report showed U.S. consumer price index (CPI) accelerated to 1% in May from 0.3% in April, while on an annual basis it surged 8.6% as gasoline prices hit a record high and the cost of services rose further.

Economists polled by Reuters had forecast the monthly CPI picking up 0.7%.

Core CPI prices, which exclude volatile food and energy products, climbed 6% after a 6.2% rise in April on an annual basis.

"Inflation keeps climbing and it is becoming more entrenched. While we do not expect a recession this year and have been positioning accordingly, there is much to be concerned about in terms of higher interest rates, higher volatility, and lower liquidity," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said in a note.

The U.S. Federal Reserve's policy meeting is due on June 14-15. Investors fear a tight labor market coupled with the highest inflation in four decades could force the Fed to quicken the pace of its pandemic-era policy support withdrawal.

Money markets are now pricing in 50 bps rise in rates by the U.S central bank next week, July and September. A Reuters poll also found economists see no pause in rate rises until next year.

"The market needs to realize that we are not necessarily going to expensive money. It is just the end of free money," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management in New York.

U.S. stocks have sold off sharply this year amid heightened uncertainty around the outlook of Fed's policy moves, a war in Ukraine, prolonged supply-chain snarls and pandemic-related lockdowns in China.

At 12:01 p.m. ET, the Dow Jones Industrial Average was down 760.68 points, or 2.36%, at 31,512.11, the S&P 500 was down 106.71 points, or 2.66%, at 3,911.11, and the Nasdaq Composite was down 393.89 points, or 3.35%, at 11,360.34.

For the week, all the three major indexes were down between 4.2% and 5.4% as rate-sensitive growth stocks came under pressure from elevated Treasury yields.

Dragging the indexes on Friday, Microsoft Corp and Apple Inc dipped 3.3% each.

Netflix Inc slid 4.4% after Goldman Sachs downgraded the streaming giant's stock to "sell" from "neutral" due to a possibly weaker macro environment.

The CBOE volatility index spiked to 28.79 points, its highest level since May 25.

Declining issues outnumbered advancers for a 7.47-to-1 ratio on the NYSE and a 5.23-to-1 ratio on the Nasdaq.

The S&P index recorded one new 52-week high and 43 new lows, while the Nasdaq recorded 8 new highs and 270 new lows.

(Reporting by Devik Jain, Mehnaz Yasmin and Shreyashi Sanyal in Bengaluru; Editing by Arun Koyyur and Aditya Soni)