* All three major U.S. stock indexes in the red
* U.S. factory activity contracted in August - ISM
* Dollar hits more than two-year high
* 10-year Treasury yields hit lowest since July 2016 (Updates to U.S. market open, changes dateline, previous LONDON, changes byline)
By Stephen Culp
NEW YORK, Sept 3 (Reuters) - Wall Street lost ground and the U.S. dollar strengthened to its highest level in more than two years on Tuesday as trade worries persisted and U.S. factory activity entered contraction territory for the first time since February 2016.
As new tariffs on Chinese goods went into effect over the U.S. Labor Day weekend, market participants are apparently losing faith that the world's two largest economies will reach a near-term resolution to their long-running trade war, which has rattled markets for months and weighed on world economies.
U.S. manufacturing output shrank in August for the first time in 3-1/2 years, according to the Institute for Supply Management's Purchasing Managers Index (PMI), stoking fears that the global economic slowdown has reached American shores. possible optimism regarding the trade talks (was) dashed by this ISM number, which showed a contraction in factory activity," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
"There's optimism that the U.S. will weather the storm with help from the Fed," Ghriskey added. "But weakness in manufacturing seems to be persistent. This wasn't a fluke report."
The Dow Jones Industrial Average .DJI fell 340.49 points, or 1.29%, to 26,062.79, the S&P 500 .SPX lost 22.79 points, or 0.78%, to 2,903.67 and the Nasdaq Composite .IXIC dropped 67.90 points, or 0.85%, to 7,894.99.
European shares fell for the first time in four sessions on Tuesday, as uncertainty over a looming no-deal Brexit and lingering U.S.-China trade tensions dampened investor optimism. pan-European STOXX 600 index .STOXX lost 0.38% and MSCI's gauge of stocks across the globe .MIWD00000PUS shed 0.56%.
Trade concerns also dampened emerging markets. market stocks lost 0.89%. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS closed 0.75% lower, while Japan's Nikkei .N225 rose 0.02%.
Trade and Brexit concerns drove the dollar, against a basket of major world currencies, to its highest level since mid-May 2017, and sent the Euro plunging to a 28-month low versus the greenback. dollar index .DXY rose 0.07%, with the euro EUR= up 0.05% to $1.0972.
The Japanese yen strengthened 0.32% versus the greenback at 105.89 per dollar, while Sterling GBP= was last trading at $1.2068, up 0.02% on the day.
U.S. Treasury yields fell, with the benchmark 10-year yield at its lowest since July 2016 following the downbeat ISM report and worries about a weakening global economy in the face of the U.S.-China trade war. 10-year notes US10YT=RR last rose 17/32 in price to yield 1.4489%, down from 1.506% late on Friday.
The 30-year bond US30YT=RR last rose 34/32 in price to yield 1.9281%, down from 1.973% late on Friday.
Rising OPEC and Russian production, combined with demand concerns due to a global economic slowdown dragged down oil prices. crude CLcv1 fell 3.39% to $53.23 per barrel and Brent LCOcv1 was last at $57.60, down 1.81% on the day.
Gold prices held steady, with the safe-haven precious metal hovering just below its more than six-year high of $1,554.56. gold XAU= added 0.9% to $1,543.47 an ounce.
Copper CMCU3 lost 0.78% to $5,576.00 a tonne.
Three-month aluminum on the London Metal Exchange CMAL3 lost 0.26% to $1,744.50 a tonne.
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