Threat of 'hard Brexit' pulls down Wall Street

By Noel Randewich

(Reuters) - U.S. stocks dropped on Tuesday as investors fretted about Britain's exit from the European Union and the prospect of a Federal Reserve interest rate hike in coming months.

It was the second straight session of losses on Wall Street, where investors were already on edge due to the uncertainty of a tight race ahead of the Nov. 8 presidential election.

Sterling slid to its lowest in more than three decades after British Prime Minister Theresa May said the country's divorce from the EU will not be "plain sailing" and that there would be "bumps in the road."

While the weaker pound sent UK stocks surging, it raised worries among U.S. investors.

"Clearly there has been some reverberation from across the pond in terms of the prospect for a slightly more disorderly UK separation from the EU," said Bill Northey, chief investment officer for the private client group at U.S. Bank in Helena, Montana.

Angst about future interest rate hikes also returned to the fore after Richmond Federal Reserve President Jeffrey Lacker said he would have voted in favour of an increase at the latest policy meeting had he been able to do so.

Traders have priced in a 63 percent chance of the Fed raising rates in December, according to the CME Group's FedWatch tool.

Meanwhile, the International Monetary Fund lowered its 2016 growth forecast for the U.S. economy to 1.6 percent from 2.2 percent and painted a gloomy picture of the global economy.

Ten of the 11 major S&P 500 indexes fell, with the high dividend-paying utilities sector <.SPLRCU> slumping 2.17 percent and telecom services <.SPLRCL> down 1.67 percent.

The Dow Jones industrial average fell 0.47 percent to end at 18,168.45 and the S&P 500 lost 0.5 percent to 2,150.49.

The Nasdaq Composite dropped 0.21 percent to 5,289.66.

Investors' attention is turning to corporate profits, with third-quarter results rolling in over the next few weeks. A failure to meet already low expectations could put new pressure on an equities market already trading at valuations above historical averages.

S&P 500 companies on average are expected to post a 0.5 percent year-over-year dip in September-quarter earnings, the fifth straight quarter of declines, according to Thomson Reuters data.

In extended trade, Micron Technology was flat after the memory chipmaker reported fiscal fourth-quarter revenue above analysts' expectations.

During the session, Sears surged 6.42 percent after Bloomberg reported that the department store chain's Craftsman tool brand had attracted multiple bidders.

Declining issues outnumbered advancing ones on the NYSE by a 2.59-to-1 ratio; on Nasdaq, a 1.62-to-1 ratio favoured decliners.

The S&P 500 posted 13 new 52-week highs and four new lows; the Nasdaq Composite recorded 82 new highs and 32 new lows.

About 7.2 billion shares changed hands on U.S. exchanges, in line with the 7.1 billion daily average for the past 20 trading days, according to Thomson Reuters data.

(Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Meredith Mazzilli and James Dalgleish)