Stocks sink; Treasury yields, dollar fall; Fed, debt ceiling in focus

Oil prices tumble on economic concerns

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U.S. Treasury yields fall sharply, U.S. dollar down

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Major U.S. stock indexes fall ~1%

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Bank, energy sectors outperform broader market

NEW YORK, May 2 (Reuters) - Wall Street shares fell on Tuesday, a day ahead of the Federal Reserve's interest rate decision, while U.S. Treasury yields fell as investors worried the government could run out of cash June 1 without a debt ceiling hike.

Bank stocks underperformed sharply after the weekend failure of U.S. regional bank First Republic Bank. Oil prices fell 5% to a five-week low on worries about a U.S. default, weak economic data and expectations for more rate hikes in the U.S. and Europe.

The dollar index dipped after disappointing U.S. data a day before the Fed is expected to hike rates by an additional 25 basis points and give guidance on whether it plans to raise rates further in June.

U.S. President Joe Biden summoned the four top congressional leaders to the White House next week. Late on Monday, the Treasury Department had said the United States could

run out of the cash needed to pay its bills in the next month.

Regional U.S. banks posted the biggest declines after the failure, over the weekend of

First Republic

and agreed sale of its assets to JPMorgan Chase.

Investors are worried more banks could start to show steep deposit outflows like First Republic, the third major U.S. bank to collapse since March, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

"Couple that with the Fed's rate decision tomorrow and you've elevated levels of anxiety in financials spilling over the market in general ... the debt ceiling limit is part of an elevated anxiety," James said.

The Dow Jones Industrial Average fell 397.69 points, or 1.17%, to 33,654.01, the S&P 500 lost 47.61 points, or 1.14%, to 4,120.26 and the Nasdaq Composite dropped 120.37 points, or 0.99%, to 12,092.23.

The pan-European STOXX 600 index had closed down 1.24% and MSCI's international gauge of stocks shed 0.96%. Emerging market stocks lost 0.28%.

Michael O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut said "investors are recognizing that there's challenges in the near term" citing headwinds including the Fed meeting, the looming debt ceiling and bank concerns as well as weak economic data.

Data showed U.S. job openings fell for a third straight month in March even as they remained at levels consistent with a tight labor market.

The dollar lost ground after the U.S. jobs data and a report that showed factory orders below expectations.

The dollar index fell 0.215%, with the euro up 0.21% to $1.0998. The Japanese yen strengthened 0.62% versus the greenback at 136.65 per dollar, while Sterling was last trading at $1.2468, down 0.22% on the day.

In Treasuries, benchmark 10-year Treasury yields were down 13.3 basis points to 3.441%, from 3.574% late on Monday. The 30-year bond was last down 8.5 basis points to yield 3.7322%. The 2-year note was last was down 15.7 basis points to yield 3.9819%.

U.S. crude oil futures settled down $4 or 5.29% at $71.66 per barrel and Brent finished at $75.32, down $3.99 or 5.03% on the day.

Gold extended gains, on track for its biggest daily rise in a month, as yields dropped on renewed fears of contagion in the U.S. banking sector and ahead of the Fed's rate decision.

Spot gold added 1.6% to $2,013.78 an ounce. U.S. gold futures gained 1.51% to $2,013.40 an ounce.