* Indexes cut gains, fall to session lows
* Ukraine engaged Russia armored column
* Monster rallies on Coca-Cola taking stake
* Indexes down: Dow 0.8 percent, S&P 0.7 percent, Nasdaq 0.6 percent (Updates to midday trading)
NEW YORK, Aug 15 (Reuters) - U.S. stocks fell on Friday, reversing earlier gains as forces in Ukraine engaged a Russian armored column on Ukrainian soil, raising the prospect of a deeper escalation in the region's unrest.
Markets had opened higher as investors continued to bet that the tension between Ukraine and Russia was waning. However, a Ukrainian military spokesman said Ukrainian forces had tracked a Russian armored column after it crossed the border into Ukraine, and that after the engagement "part of it no longer exists." Shares turned lower in heavy volume.
Investors have been concerned about the potential fallout from any escalation between the two countries, though recent signs of easing tensions had lifted equities this week.
"It is hard to know how serious this is, but any sustained upturn in violence could lead to a short-term setback," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Asset Management.
Despite stocks' decline, indexes remain on track for their second straight week of gains, and the S&P 500 is less than 2 percent away from a record close hit in July.
"So far it has not paid to get too defensive," said McDonald, who oversees about $884 billion in assets.
The Dow Jones industrial average fell 135.41 points or 0.81 percent, to 16,578.17, the S&P 500 lost 13.4 points or 0.69 percent, to 1,941.78 and the Nasdaq Composite dropped 24.61 points or 0.55 percent, to 4,428.39.
The CBOE Volatility index, a measure of investor anxiety, jumped 20 percent, though at 14.94 it is below its long-term average of 20.
The S&P 500 at one point rose as much as 0.45 percent on Friday. For the week, the Dow is up 0.6 percent, the S&P is up 1 percent and the Nasdaq is up 1.7 percent.
In others reasons for caution, the New York Federal Reserve's report on manufacturers showed business conditions improved in August, though at a slower rate than expected, while U.S. consumer sentiment fell in August to its lowest since last November, according to the Thomson Reuters/University of Michigan Surveys of Consumers.
Monster Beverage Corp jumped 28 percent to $92 after Coca-Cola Co said it was buying a 16.7 percent stake in the company for $2.15 billion.
The stock was the S&P's biggest gainer, followed by Applied Materials Inc, up 4.9 percent to $22.18 a day after it reported third-quarter earnings that beat expectations.
On the downside, Nordstrom Inc fell 4 percent to $65.95 a day after its results, the latest disappointing read for the retail sector after both Macy's Inc and Wal-Mart cut their outlooks this week. (Editing by Bernadette Baum and James Dalgleish)