By April Joyner

NEW YORK (Reuters) - U.S. stocks fell on Tuesday as a sharp escalation in the trade dispute between the United States and China rattled markets and put the Dow Jones Industrial Average back in negative territory for the year.

President Donald Trump threatened to impose a 10 percent tariff on another $200 billion of Chinese goods, and Beijing warned it would retaliate.

Trump said his move followed China's decision to raise tariffs on $50 billion in U.S. goods, which came after the White House announced similar tariffs on Chinese goods on Friday.

"Investors are waking up to the idea that all the rhetoric on trade could be more than just a negotiating tactic," said Emily Roland, head of capital markets research at John Hancock Investments in Boston.

The Dow Jones Industrial Average fell 287.26 points, or 1.15 percent, to 24,700.21, the S&P 500 lost 11.18 points, or 0.40 percent, to 2,762.57 and the Nasdaq Composite dropped 21.44 points, or 0.28 percent, to 7,725.59.

The three major indexes pared losses from earlier in the session. The Dow briefly dropped below its 100-day moving average but rebounded, though the index ended the session below its 50-day moving average.

Given the escalating rhetoric on trade, some investors said the slide in U.S. stocks was relatively small.

"The U.S. market has acted much stronger than the global equity markets," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. "It's a sedate reaction."

The CBOE Volatility Index, commonly known as Wall Street's fear gauge, hit nearly a three-week high of 14.68 points, before easing to 13.35.

The small-cap Russell 2000 index, whose components are more domestically focused than large-cap companies, edged up 0.1 percent.

Sectors seen as bond proxies due to their high dividend yields, such as utilities, telecoms and consumer staples, advanced.

Shares of Boeing, which has been a proxy for trade-war tensions with China, fell 3.8 percent, weighing the most on the Dow. Construction equipment maker Caterpillar closely followed with a 3.6 percent drop.

The declines weighed on the S&P industrials index, which fell 2.1 percent, its biggest one-day percentage drop in nearly two months.

Shares of chipmakers, which depend on China for a large portion of their revenue, slipped. The Philadelphia Semiconductor index fell 1.2 percent.

Tariff worries dragged FedEx Corp down 2.0 percent. The logistics company's shares were the biggest weight on the Dow Transports, which fell 1.7 percent. FedEx is scheduled to issue its quarterly report after the bell on Tuesday.

Declining issues outnumbered advancing ones on the NYSE by a 1.41-to-1 ratio; on Nasdaq, a 1.34-to-1 ratio favored decliners.

The S&P 500 posted seven new 52-week highs and five new lows; the Nasdaq Composite recorded 135 new highs and 48 new lows.

Volume on U.S. exchanges was 7.12 billion shares, compared to the 6.95 billion average for the full session over the last 20 trading days.

(Additional reporting by Medha Singh in Bengaluru; Editing by Chizu Nomiyama and Tom Brown)