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* Apple set to drop for third session on tariff worries
* Trade-sensitive Boeing, Caterpillar and chip stocks slide
* Volatility index at near 3-month high
* Tyson Foods rises after profit beats estimates
* Indexes drop: Dow 2.06%, S&P 2.12%, Nasdaq 2.77% (Changes quote, adds details; Updates prices)
Aug 5 (Reuters) - Wall Street's main indexes fell sharply on Monday, with the Dow Jones Industrial Average tumbling more than 500 points, as China's willingness to let the yuan slide in response to the latest U.S. tariff threat fanned fears that it could further aggravate an ongoing trade war.
The yuan breached the key 7-per-dollar level for the first time in more than a decade, and President Donald Trump slammed it as "a major violation", sending investors scurrying for the safety of assets such as government bonds, gold and the Japanese yen.
Trump stunned financial markets last week by threatening to impose 10% tariffs on the remaining $300 billion of Chinese imports, abruptly abandoning a brief ceasefire.
"The currency move is part of the trade war," said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey.
"It is a bold statement to the U.S. that says if you want to play, we could play a different way as well. It takes any optimism out of the market that there will be a quick resolution to trade (war)."
On Friday, the benchmark S&P 500 and the Nasdaq suffered their worst weekly performance of 2019, in a week that also saw the U.S. Federal Reserve cut interest rates for the first time in a decade.
At 11:02 a.m. ET, the Dow was down 546.37 points, or 2.06%, at 25,938.64, the S&P 500 was down 62.14 points, or 2.12%, at 2,869.91.
The Nasdaq Composite was down 221.50 points, or 2.77%, at 7,782.57.
The sell-off was broad, with all the 11 major S&P sectors in the red. The S&P technology sector, heavily exposed by its chipmakers and other global technology players to Chinese markets, dropped 3.2%.
Apple Inc slid 4.1% as analysts warned that the newly proposed tariffs may hurt demand for its flagship iPhone, while the Philadelphia chip index slipped 3.7%.
The CBOE Volatility index, a gauge of investor anxiety, rose to its highest level in about three months at 21.36 points.
U.S. Treasury yields tumbled, with the 10-year yields hitting their lowest level since November 2016.
The difference between the three-month Treasury bill rate and 10-year yields grew to the widest since April 2007. This curve "inversion" between the two maturities has preceded every U.S. recession in the past 50 years.
Interest-rate sensitive banks shed 3.02%.
The rest of the high-flying FAANG group also lost ground. Facebook Inc, Amazon.com Inc, Netflix Inc and Google-parent Alphabet Inc were down between 2.5% and 4%.
No.1 U.S. meat processor Tyson Foods Inc was one bright spot, up 7.8% after beating quarterly profit estimates.
Declining issues outnumbered advancers for a 7.17-to-1 ratio on the NYSE and for a 7.42-to-1 ratio on the Nasdaq.
The S&P index recorded three new 52-week highs and 26 new lows, while the Nasdaq recorded nine new highs and 215 new lows. (Reporting by Medha Singh and Arjun Panchadar in Bengaluru; editing by Patrick Graham, Anil D'Silva and Sriraj Kalluvila)