By Abhiram Nandakumar and Sweta Singh
(Reuters) - U.S. stocks extended their losses in afternoon trading on Monday and were set for their worst third quarter in four years as investors worried about the health of China's economy and its potential impact on the timing of a U.S. interest rate increase.
The S&P 500 and the Nasdaq composite were down more than 2 percent, while the Dow Jones industrial average fell about 1.5 percent. All 10 S&P sectors down.
Healthcare stocks continued the decline that started last week after Democratic presidential candidate Hillary Clinton criticized drug pricing.
The Nasdaq biotechnology index <.NBI> fell 3.8 percent as investors continued to flee the sector, following its worst week in seven years. Among the S&P sectors, the health care index <.SPXHC> was the top decliner.
"The broad healthcare sector and China are hurting the market. It's time for risk-off and there's no place to hide," said Richard Weeks, managing director at HighTower Advisors in Vienna, Virginia.
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The Federal Reserve held off from raising rates at its September meeting, citing concerns about the health of the global economy, notably China, among other factors.
Profits at Chinese industrial companies fell 8.8 percent, fresh data showed, pushing down shares of raw material producers and energy companies. Oil prices fell more than 2 percent.
Schlumberger was the biggest drag on the energy index with a 3.8 percent fall, while Dow Chemical weighed on the S&P materials index <.SPLRCM>.
U.S. consumer spending rose more than expected in August, data showed on Monday, appearing to add to the case for an interest rate increase this year.
However, contracts to buy previously owned U.S. homes decreased, indicating the robust housing market could be losing some steam.
New York Federal Reserve President William Dudley on Monday added to the expectations of an early rate increase, suggesting the central bank could pull the trigger as soon as in October.
Several other Fed officials are scheduled to speak during the week, including Yellen on Wednesday.
"(The Fed) is concerned that the decelerations of global GDP will have a significantly higher effect on the U.S. than the markets are pricing," said Omar Aguilar, chief investment officer of equities at Charles Schwab Investment Management in San Francisco.
Investors will keep a close eye on data this week, with September non-farm payrolls data scheduled to be released on Friday.
At 13:53 a.m. EDT (1753 GMT), the Dow Jones industrial average was down 265.41 points, or 1.63 percent, at 16,049.26, the S&P 500 was down 43.28 points, or 2.24 percent, at 1,888.06 and the Nasdaq Composite was down 131.80 points, or 2.81 percent, at 4,554.70.
"What we have here is a jittery market, and with two days left to the quarter I don't see much of a change in direction," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
"I think the markets will continue to hold the low end of the trading range."
The CBOE Volatility index <.VIX>, known as Wall Street's "fear gauge", jumped 14 percent to 26.91, well above its long-term average of 20.
Alcoa's shares were up 4.2 percent at $9.45 after the aluminium producer said it would split into two publicly traded companies.
Apple fell 1.3 percent to $113.20 despite reporting that it sold a record number of its new iPhones in the first weekend on the market.
Media General soared 23.50 percent to $13.77 after Nexstar offered to buy the company in a deal valued at $4.1 billion. Nexstar was up 1.2 percent at $45.04.
Huntsman shares plunged 23 percent after the chemical maker warned it expects third quarter to be hurt by soft demand in Asia Pacific and lower titanium dioxide selling prices.
Declining issues outnumbered advancing ones on the NYSE by 2,718 to 353. On the Nasdaq, 2,309 issues fell and 502 advanced.
The S&P 500 index showed no new 52-week highs and 73 new lows, while the Nasdaq recorded 8 new highs and 318 new lows.
(Reporting by Abhiram Nandakumar and Sweta Singh in Bengaluru and Sinead Carew in New York; Editing by Savio D'Souza and Saumyadeb Chakrabarty)