US STOCKS-Wall St set for biggest monthly drop in more than 3 yrs

* Inflation to likely rebound - Fed's Fischer

* Twitter (Xetra: A1W6XZ - news) rises after broker upgrade

* Phillips 66 (NYSE: PSX - news) up after Buffett discloses stake

* Indexes down: Dow 0.81 pct, S&P 0.81 pct, Nasdaq 0.70 pct (Adds details, changes comment, updates prices)

By Tanya Agrawal

Aug 31 (Reuters) - U.S (Other OTC: UBGXF - news) . stocks were poised for their worst monthly drop in more than three years on worries about the health of China's economy and the timing of a U.S. interest rate hike.

All three major indexes slipped more than 1 percent on Monday after weekend comments from Federal Reserve Vice Chairman Stanley Fischer appeared to keep the door open for a rate hike in September.

The No. 2 Fed official said U.S. inflation would likely rebound as pressure from the dollar fades, allowing the Fed to raise interest rates gradually.

Fischer's remarks at the global central banking conference in Jackson Hole, Wyoming suggest the Fed could look beyond a week of stock market turmoil brought on by persistent fears that China's economy is faltering.

"We can still expect to see some significant drops in the market till we get some direction from the Fed regarding a rate increase," said John DeClue, chief investment officer of U.S. Bank Wealth Management.

"However, we still think there is a less than 50 percent chance of a rate hike in September because we're not really seeing a rise in inflation and unless we get an unbelievably strong jobs report this week, December still seems more likely."

Investors will be keeping a sharp eye on economic data again this week, especially the monthly jobs report on Friday, the last one before the Fed meets on Sept. 16-17.

The U.S. central bank has said it will raise rates only when it sees a sustained recovery in the economy. While the job market has improved steadily, inflation has remained below the central bank's 2 percent target for more than three years.

A decade of near-zero interest rates has helped the U.S. stock market stage a spectacular bull-run since the financial crisis.

But fears about the health of the Chinese economy buffeted global stock markets this month and pushed prices of oil and other commodities lower.

Wall Street closed flat on Friday after a tumultuous week in which the Dow slumped more than 1,000 points at one point last Monday. The market subsequently rallied, posting its biggest two-day gain since the financial crisis.

At 11:04 a.m. ET (1504 GMT) on Monday, the Dow Jones industrial average was down 134.89 points, or 0.81 percent, at 16,508.12, the S&P 500 was down 16.08 points, or 0.81 percent, at 1,972.79 and the Nasdaq composite was down 33.66 points, or 0.70 percent, at 4,794.67.

The S&P and the Nasdaq look set to post their biggest monthly loss since May 2012, while the Dow is on track for its worst monthly loss since 2010.

All 10 major S&P sectors were lower with the utilities index's 2.02 percent fall leading the decliners.

The CBOE Volatility index, known as Wall Street's "fear gauge", rose about 8 percent to 28.15 on Monday, above its long-term average of 20. It (Other OTC: ITGL - news) spiked to as much as 53.29 last week.

Twitter was up 2.5 percent at $27.72 after SunTrust Robinson (LSE: RBN.L - news) raised its rating to "buy" from "neutral".

Netflix (Xetra: 552484 - news) fell 2.3 percent to $114.95 after the company said it chose not to renew its agreement with cable network Epix.

Phillips 66 was up 2.3 percent at $78.99 after Warren Buffett's Berkshire Hathaway (Sao Paolo: BERK34.SA - news) disclosed a $4.48 billion stake in the oil refiner.

Declining issues outnumbered advancers on the NYSE by 1,995 to 919. On the Nasdaq, 1,515 issues fell and 1,114 rose.

The S&P 500 index showed one new 52-week high and two new lows, while the Nasdaq recorded 16 new highs and 13 new lows. (Reporting by Tanya Agrawal; Editing by Saumyadeb Chakrabarty)