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* China ready to hit back at U.S. with rare earths - newspapers
* All major S&P sectors fall
* Capri plunges after profit forecast disappoints
* Dow down 1.16%, S&P 500 down 0.89%, Nasdaq down 0.87% (Updates to midafternoon, changes byline)
NEW YORK, May 29 (Reuters) - U.S. stocks slumped on Wednesday, with the S&P 500 and Nasdaq testing a key support level, as worries a prolonged trade war between the United States and China would dent global growth pushed investors toward the safety of government bonds.
Trade tensions between the two largest economies in the world showed little signs of dissipating as Chinese newspapers warned Beijing could use rare earths to strike back at the U.S. after President Donald Trump remarked on Monday he was "not yet ready" to make a deal with China over trade. Rare earths are a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment.
Adding to worries, China's Huawei Technologies Co Ltd filed a lawsuit against the U.S. government late on Tuesday in its latest bid to fight sanctions from Washington.
"Now we are starting to see investors react to lower growth expectations," said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.
"It is a combination of this protracted trade dispute, lousy data and Fed caution. Investors are putting all those ingredients in a hat and coming up with a pretty ugly stew."
Each of the major U.S. indexes were on track for their fourth decline in five sessions. Both the S&P 500 and Nasdaq were trading just above their 200-day moving averages, seen as a key level of support. The S&P is down nearly 6% from its April 30 closing high.
The uncertainty in markets have pressured investors to dump equities and seek safety in U.S. government debt, which has led to an inversion of the yield curve between 3-month bills and 10-year notes, a precursor to a possible recession. Benchmark U.S. 10-year note yields touched a low of 2.21%, the lowest since September 2017.
Federal funds futures indicated that traders saw a 60% chance the U.S. central bank would lower policy rates by a quarter of a percentage point at its Sept. 17-18 meeting, compared with a 50% likelihood late on Tuesday.
Each of the 11 major S&P sectors were in negative territory, with more than half down at least 1% and healthcare the worst performer.
The Dow Jones Industrial Average fell 293.74 points, or 1.16%, to 25,054.03, the S&P 500 lost 25.06 points, or 0.89%, to 2,777.33 and the Nasdaq Composite dropped 66.11 points, or 0.87%, to 7,541.24.
The Dow Jones Industrial Average touched its lowest level since Feb. 8 while the S&P and Nasdaq touched their lowest levels in nearly three months.
The benchmark S&P index briefly fell below its 200-day moving average, a key indicator of long-term momentum during the session.
Among other stocks, Johnson & Johnson dropped 5.83% after a lawsuit that accused the drugmaker of fueling the U.S. opioid epidemic went into its second day of trial, pulling healthcare stocks down 1.20%.
Capri Holdings Ltd plunged 10.40% as the worst performing S&P 500 component after the Michael Kors fashion business owner issued a disappointing first-quarter profit forecast as it spends more on marketing.
General Mills dropped 6.10% after Goldman Sachs downgraded the cereal maker's stock to "sell".
Declining issues outnumbered advancing ones on the NYSE by a 2.33-to-1 ratio; on Nasdaq, a 2.38-to-1 ratio favored decliners.
The S&P 500 posted no new 52-week highs and 40 new lows; the Nasdaq Composite recorded 20 new highs and 201 new lows. (Reporting by Chuck Mikolajczak; editing by Jonathan Oatis)