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* Indexes drop: Dow 2.70%, S&P 2.71%, Nasdaq 2.99%
* U.S. Treasury bond curve inverts for 1st time since 2007
* Macy's slides after FY outlook cut; weighs on rivals
* Rate-sensitive banks slump (Updates to early afternoon)
By Medha Singh and Arjun Panchadar
Aug 14 (Reuters) - Wall Street main indexes slumped more than 2.5% on Wednesday, as a closely watched U.S. bond market indicator pointed to a renewed risk of recession following poor economic data from Germany and China.
The S&P 500 index has now sunk 4.5% since President Donald Trump announced a fresh round of tariffs on Chinese imports at the start of August and is on course for its worst three-week percentage slide this year.
A brief recovery on Tuesday on signs that Washington would delay some of those moves quickly evaporated on Wednesday morning.
Yields on two-year Treasury notes rose above the 10-year yield for the first time since 2007, a metric widely viewed as a classic recession signal, spooking investors.
The interest-rate sensitive bank subsector plunged 4.3%, while the broader financial sector fell 3.5%, putting them on course for their biggest one-day percentage fall this year.
"The bond market is the one that seems to be leading, the stock market is just kind of following at this point. That tells you we are in a headline market where investors will react quickly to what the flavor of the day is," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
"If you look at the U.S. fundamentals right now, growth is decent and earnings have been good and that supports stock market at this level."sonos sonos One (Gen 2) - Voice Controlled Smart Speaker with Amazon Alexa Built-in - Black read more
Adding to grim mood was data showing Germany's economy contracted in the second quarter, while Chinese industrial output growth cooled to a more than 17-year low in July.
The CBOE Volatility index, also known as Wall Street's "fear gauge", rose 5.2 points to 22.71.
Eight of the 11 major S&P sectors shed more than 2%. Only the defensive utilities sector was higher, while consumer staples and real estates posted the smallest losses.
At 13:04 p.m. ET, the Dow Jones Industrial Average was down 709.51 points, or 2.70%, at 25,570.40, the S&P 500 was down 79.36 points, or 2.71%, at 2,846.96. The Nasdaq Composite was down 239.60 points, or 2.99%, at 7,776.76.
The energy sector shed 3.9% as oil prices slumped on demand worries.
Shares of Apple Inc were down 2.7% after boosting markets a day earlier with a 4% rise. Chipmakers were also down, with the Philadelphia chip index slumping 3.4%.
The biggest decliner on the S&P 500 index was Macy's Inc , down 14.6%, after the department store operator cut its full-year profit forecast as it discounted heavily to clear excess spring season inventory.
Rivals Kohl's Corp, Target Corp and Nordstrom Inc slipped between 3.2% and 10.8%.
Declining issues outnumbered advancers for a 4.97-to-1 ratio on the NYSE and for a 5.64-to-1 ratio on the Nasdaq.
The S&P index recorded eight new 52-week highs and 51 new lows, while the Nasdaq recorded 14 new highs and 221 new lows. (Reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Anil D'Silva)
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