* Yellen says U.S. recovery incomplete, but certain stocks are over-valued
* ZEW sentiment reading at lowest level since January 2013
* Crude oil prices fall steeply (Adds Yellen testimony, updates to the open of U.S. trading; changes dateline; previous LONDON)
NEW YORK, July 15 (Reuters) - U.S. stocks slipped on Tuesday, with riskier equities hit hardest after the U.S. Federal Reserve, in an unusual statement, singled out the valuation of social media and biotechnology shares as "substantially stretched."
Bond prices fell slightly and gold was lower as Fed Chair Janet Yellen's comments suggested interest rate hikes could come sooner than anticipated if the labor market continued to improve.
The Fed's semi-annual monetary policy report, which accompanied Yellen's testimony to the Senate Banking Committee, noted that overall U.S. stock valuations were "generally at levels not far above their historical averages," even as it singled out riskier sectors of the market.
Social media and biotechnology shares slumped following the release of the report, with the Nasdaq Biotech Index down 1.9 percent on the day.
"These are the subindustries that have caused a lot of long-time stock watchers to scratch their heads. These companies have relative few earnings, especially in the biotech area," said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
Overall, Yellen said the U.S. economic recovery was incomplete and she defended the central bank's accommodative monetary policies. She said some signs of a pickup in inflation were not enough for the Fed to accelerate its plans for raising interest rates, but improved labor markets might accelerate the process.
"If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned," she said.
That comment boosted bond yields modestly. The U.S. 10-year Treasury note turned negative, falling 2/32 of a point in price, the yield rising to 2.554 percent.
Gold prices fell 0.7 percent and are down more than 3 percent this week. Copper was up 0.1 percent.
U.S. crude oil fell 1.7 percent to $99.16, falling under $100 per barrel for the first time since May. Brent crude tumbled 2.3 percent to three-month lows as rising supplies from Libya overshadowed renewed violence in the country.
The Dow Jones industrial average was down 11.43 points, or 0.07 percent, at 17,043.99. The Standard & Poor's 500 Index was down 5.71 points, or 0.29 percent, at 1,971.39. The Nasdaq Composite Index was down 30.34 points, or 0.68 percent, at 4,410.08.
The MSCI World Index and a measure of European equities both lost 0.2 percent, due to weakness in Europe and the slight decline in the United States. European shares hovered around session lows following a drop in Germany's ZEW index of economic sentiment. The MSCI International ACWI Price Index fell 0.2 percent.
Yellen's comments overshadowed some strong results from U.S. banks.
U.S. financial shares were boosted by results from both JPMorgan Chase & Co and Goldman Sachs Group Inc. But they pared those gains after Yellen began her testimony.
The U.S. dollar index rose 0.2 percent, while the euro fell to a one-month low against the dollar on higher-than-forecast inflation data from Britain.
The Bank of Japan maintained its stimulus program and stuck to a forecast that inflation will approach its 2 percent target next year, unfazed by recent data casting doubt on its scenario of an investment-led economic recovery.
Japan's Nikkei average rose 0.6 percent while shares in Hong Kong rose 0.5 percent.
The MSCI Emerging Market index, MSCI's benchmark emerging equity index, inched up to a 16-month high.
Asian stock markets showed little reaction to stronger-than-expected new loan and money supply data for China. Chinese banks gave 1.08 trillion yuan ($173.90 billion) of new loans in June, beating expectations of 915 billion.
The data, coming ahead of GDP and other numbers from China due on Wednesday, underscored the perception that the Chinese economy is stabilizing after a shaky start to the year but still needs more policy support to meet Beijing's growth target. (Editing by Dan Grebler)