* U.S. stock indexes on track for third month of gains
* Treasuries pare losses as weak data stoke safe-haven bids
* Dollar index rises to near 2-month peaks on rate hike view
* U.S. oil futures give back gains tied to driving demand (Updates market action, adds quotes)
By Richard Leong
NEW YORK, May 31 (Reuters) - U.S. stock prices fell on Tuesday on weaker-than-expected economic data, while expectations of a possible Federal Reserve interest rate increase lifted the dollar to near a two-month high against a basket of currencies.
The drop on Wall Street stoked safe-haven bids for gold and less riskier U.S. and German government debt. Oil futures faded into the red after rising earlier on expected U.S. gasoline demand for summer driving.
The S&P 500 index is poised for a third straight month of gains in May, but it may struggle to post further gains due to the risk of a Fed rate increase and worries about Britain’s June 23 referendum on European Union membership.
“Equities will be in sideways trading going into the middle of the year with a possible rate hike and the vote in the UK,” said Bill Northey, chief investment officer for U.S. Bank’s private client group in Helena, Montana.
U.S. interest rate futures implied traders saw a 28 percent chance the Fed would raise rates next month and a 61 percent chance it would do so at its July policy meeting, according to CME Group’s FedWatch program.
Worries about Britain’s economy grew after two polls showed those campaigning for an exit from the EU had taken the lead. Sterling fell to one-week lows against the dollar and euro.
The dollar index, which tracks the greenback against a basket of six major currencies, rose 0.3 percent to 95.842, below a two-month high of 95.968 set on Monday. It was on track for a 2.7 percent gain for the month, its best performance in six months.
“Brexit” has complicated traders’ assessment of the likelihood of a Fed rate increase because a British vote to leave the EU could result in market turmoil and pose further drag on a sluggish global economy.
OIL PRICES DIP
U.S. personal income and spending data on Tuesday suggested the economy is rebounding from a weak first quarter, led by a surprisingly strong 1 percent rise in personal consumption in April, but dismal readings on consumer confidence and Midwest manufacturing raised worries the recovery may be short-lived.
The Dow Jones industrial average was down 118.44 points, or 0.66 percent, to 17,754.78, the S&P 500 was down 6.48 points, or 0.31 percent, to 2,092.58 and the Nasdaq Composite was down 1.76 points, or 0.04 percent, to 4,931.74.
U.S. and British markets were closed on Monday for local holidays.
The FTSEurofirst 300 index index ended down 0.8 percent, but still booked its biggest monthly gain since November.
Earlier on Tuesday, Tokyo’s Nikkei ended up 1 percent for a monthly gain of 3.4 percent.
The MSCI world equity index, which tracks shares in 45 nations, fell 0.1 percent to 402.66.
As stocks slipped into negative territory, U.S. Treasuries pared initial losses.
The yield on benchmark U.S. 10-year Treasury notes was little changed at 1.839 percent after rising as much as 5.5 basis points from Friday.
In commodities trading, U.S. crude settled down 23 cents, or 0.47 percent, at $49.10 a barrel, while Brent crude settled down 7 cents, or 0.24 percent, at $49.69.
Spot gold prices rose $11.71, or 0.97 percent, to $1,216.91 an ounce. (Additional reporting by Anirban Nag, Sudip Kar-Gupta and Jemima Kelly in London; Editing by Nick Zieminski and Paul Simao)