US STOCKS-Wall St retreats from record high as energy shares fall with oil

* U.S (Other OTC: UBGXF - news) . crude falls below $40/barrel for first time since mid-April

* SolarCity (Swiss: SCTY.SW - news) down after Tesla says to buy the company

* Exxon and Chevron (Euronext: CHTEX.NX - news) biggest drags on S&P and Dow

* Dow down 0.22 pct, S&P down 0.17 pct, Nasdaq (NasdaqGS: NDAQ - news) up 0.41 pct (Updates to late afternoon; changes byline)

By Chuck Mikolajczak

Aug 1 (Reuters) - The S&P 500 and the Dow dipped in afternoon trading on Monday, as a drop in oil prices dragged down energy stocks, while tech names Apple (LSE: 0R2V.L - news) and Alphabet (Xetra: ABEA.DE - news) helped drive the Nasdaq higher.

The S&P had hit a record high earlier in the session, but was unable to hold gains as U.S. crude fell below $40 a barrel to its lowest level since April.

The correlation between oil prices and equities, which had been very strong until oil rose above $40, is resurfacing now, said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas.

"If oil falls back below $40, which it appears it is going to, it is likely that correlation will come back and that is what we are seeing now."

The S&P gained 3.6 percent in July - its best month since March - touching intraday highs seven times, on improving economic data and as corporate earnings were not as bad as had been initially feared.

Earnings are now expected to decline 3 percent for the second quarter, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data, an improvement from the 4.5 percent decline expected on July 1.

Exxon and Chevron were down 2.9 percent and 3.3 percent, respectively, and were the biggest drags on both the Dow and the S&P 500. The S&P energy sector lost 3.3 percent.

The Dow Jones industrial average fell 41.46 points, or 0.22 percent, to 18,390.78, the S&P 500 lost 3.73 points, or 0.17 percent, to 2,169.87, and the Nasdaq Composite added 21.24 points, or 0.41 percent, to 5,183.37.

Apple Inc rose 1.3 percent, providing the biggest boost to the three main indexes. Apple has gained more than 9 percent since reporting results last week. Google parent Alphabet Inc was up 1.5 percent at $803.04.

After tepid U.S. second-quarter gross domestic product data on Friday dimmed some of the optimism over the state of the economy, data on Monday showed U.S. manufacturing activity slowed in July as orders fell broadly and construction spending dropped in June.

Traders saw the chance of a Federal Reserve interest rate hike by year-end at about 35 percent, according to CME Group (Kuala Lumpur: 7018.KL - news) 's Fedwatch, down from more than 50 percent last week.

SolarCity Corp fell 7.8 percent, to $24.62, and Tesla Motors (Xetra: A1CX3T - news) declined 1.6 percent, to $230.99, after Tesla said the two companies had agreed to merge.

Declining issues outnumbered advancing ones on the NYSE by a 1.44-to-1 ratio. On Nasdaq, a 1.05-to-1 ratio favored advancers.

The S&P 500 posted 36 new 52-week highs and no new lows; the Nasdaq Composite recorded 96 new highs and 18 new lows. (Reporting by Chuck Mikolajczak; Editing by Leslie Adler)