US STOCKS-S&P 500 at lowest since March as rate fears set in

* Wal-Mart surges after results beat estimates

* NY Fed's Dudley says June, July hike "reasonable"

* Monsanto (Hamburg: 1132157.HM - news) rallies after Bayer (LSE: 0P6S.L - news) makes unsolicited bid

* Indexes down: Dow 0.69 pct, S&P 0.65 pct, Nasdaq (NasdaqGS: NDAQ - news) 0.90 pct (Updates to afternoon)

By Noel Randewich

May 19 (Reuters) - The S&P 500 was heading for its lowest close in two months on Thursday as Wall Street became more worried that the U.S (Other OTC: UBGXF - news) . Federal Reserve might raise interest rates as early as June.

The timing of future rate hikes by the Fed in the face of a sluggish economy is a major ongoing concern among stock investors who have benefited from historically low borrowing costs since the 2008 financial crisis.

In a new blow to Wall Street's confidence, New York Fed President William Dudley said on Thursday the U.S. economy could be strong enough to warrant an interest rate increase in June.

That followed the release on Wednesday of minutes from the Fed's April meeting that showed most policymakers thought a June rate hike was appropriate, surprising many investors who had expected policymakers to wait until September due to a lackluster economic recovery.

Higher rates choke inflation but also hamper economic expansion and reduce liquidity in stock markets.

"I know they have 150 PhD economists over there who are probably smarter than I am, but they're misreading the situation," said Donald Selkin, chief market strategist at National Securities in New York. "This, to me is, the worst possible thing they can do."

Six of the S&P 500's sectors were lower, led down by a 1.1 percent loss in industrials.

The S&P 500's dip put it on track for its lowest close since mid-March and left it down 0.5 percent for 2016.

At 2:55 pm, the Dow Jones industrial average was down 0.69 percent at 17,406.16 points and the S&P 500 had lost 0.65 percent to 2,034.41.

The Nasdaq Composite dropped 0.9 percent to 4,696.38.

Microsoft (Euronext: MSF.NX - news) fell 1.36 percent and weighed most on the S&P 500.

Dow component Wal-Mart's shares surged 9 percent after the retailer's first-quarter results beat analysts' estimates.

Cisco Systems (HKSE: 4333.HK - news) rose 3.5 percent after the network equipment maker reported better-than-expected results.

Monsanto gained 4.26 after disclosing German group Bayer made an unsolicited takeover proposal.

Declining issues outnumbered advancing ones on the NYSE by 2,299 to 703. On the Nasdaq, 2,012 issues fell and 748 advanced.

The S&P 500 index showed six new 52-week highs and four new lows, while the Nasdaq recorded 14 new highs and 71 new lows. (Additional reporting by Yashaswini Swamynathan; Editing by Nick Zieminski)