* Fed unveils balance sheet unwind timing, signals Dec. rate hike
* Financial index gains, utilities and consumer staples fall
* Apple drags on Nasdaq, says smartwatch has connectivity problem
* Dow rises 0.19 pct, S&P up 0.06 pct, Nasdaq falls 0.08 pct (Updates to close, adds commentary)
NEW YORK, Sept 20 (Reuters) - The S&P 500 and the Dow ended slightly higher on Wednesday, adding to their string of closing records, after the Federal Reserve signaled it expects another interest rate hike by year-end and disclosed timing for reducing its balance sheet.
The Fed left rates unchanged for now, as was widely anticipated, but investors' expectations changed for December after the U.S. central bank signaled one more rate hike by year-end despite recent weak inflation readings.
In line with expectations the Fed said it would begin in October to cut its roughly $4.2 trillion in U.S. Treasury bonds and mortgage-backed securities holdings by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests.
Financial stocks jumped after the statement as U.S. Treasury yields rose on the prospect of higher rates while utilities took a fall on concerns that the defensive sector would look less attractive as rates climb.
While some investors said the Fed's tone was more hawkish than expected others were happy Fed Chair Janet Yellen reiterated her stance that balance sheet reduction would be data dependent.
"The most important thing Yellen needed to communicate to the market was that the bond sale plan and rate increases are not on autopilot," said Jason Pride, director of investment strategy at Glenmede in Philadelphia.
After the statement traders were betting on a roughly 67 percent chance of a December hike, compared with 51 percent minutes before, according to the CME Group's FedWatch tool.
"Keeping rate hikes where they were was expected. What wasn't known was the tone. The market reaction is interpreting the Fed as slightly hawkish but not too much," said Victor Jones, director of trading at TD Ameritrade in Chicago.
The Dow Jones Industrial Average rose 41.79 points, or 0.19 percent to end at 22,412.59, its seventh straight record close.
The S&P 500 gained 1.59 points, or 0.06 percent, to 2,508.24, clocking its sixth record closing high in the last seven sessions. The Nasdaq Composite dropped 5.28 points, or 0.08 percent, to 6,456.04, with Apple Inc as its biggest drag.
The S&P's financial sector ended 0.6 percent higher as banks benefit from higher rates. The sector has risen in eight of the last nine sessions and has clocked a 6.7 percent gain in that time as investors anticipated the Fed meeting.
The consumer staples sector fell 0.9 percent while the utilities sector ended 0.8 percent lower.
Shares of Apple fell 1.7 percent after it admitted its latest smartwatch has connectivity problems.
Advancing issues outnumbered declining ones on the NYSE by a 1.26-to-1 ratio; on Nasdaq, a 1.30-to-1 ratio favored advancers.
Roughly 6.7 billion shares changed hands on U.S. exchanges compared with the 6 billion average for the last 20 sessions. (Additional reporting by Karen Brettell in New York and Sruthi Shankar in Bengaluru; Editing by Nick Zieminski and James Dalgleish)