* Strong economic data pushes dollar up
* All 10 S&P sectors lower
* Indexes down: Dow 1.2 pct, S&P 1.2 pct, Nasdaq 1.3 pct (Updates to late afternoon)
By Caroline Valetkevitch
May 26 (Reuters) - The S&P 500 was on track for its biggest percentage drop since March on Tuesday as some upbeat economic data fueled expectations that a Federal Reserve rate hike could come sooner rather than later.
All 10 major S&P 500 sectors were lower, with the energy index's down the most at 1.9 percent as oil prices fell.
Transportation stocks also dropped, with the Dow Jones transportation average falling 1.6 percent to 8346.82 and hitting its lowest level since Oct. 23. The dollar was up 1.4 percent against a basket of major currencies as commodity prices fell.
"It's concern about a bunch of things, one being higher rates," said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston. "Being a shortened week, sometimes these moves get exaggerated."
Reports on Tuesday showed U.S. business investment spending plans increased solidly in April, consumer confidence perked up this month and house prices extended gains in March.
The buoyant data comes after Federal Reserve Chair Janet Yellen said on Friday that the central bank could raise interest rates this year if the economy keeps improving as expected. The comments kept the prospects of a September rate increase high.
At 3:11 p.m., the Dow Jones industrial average fell 222.14 points, or 1.22 percent, to 18,009.88, the S&P 500 lost 25.3 points, or 1.19 percent, to 2,100.76 and the Nasdaq Composite dropped 67.90 points, or 1.33 percent, to 5,021.46.
Charter Communications' shares were up 2 percent at $178.76 after it agreed to buy Time Warner Cable for $55.8 billion. Time Warner Cable rose 6.9 percent to $182.95, well below Charter's cash and stock offer of $195.71.
First Solar fell 6.8 percent to $51.33 after RBC downgraded the solar panel maker's stock to "underperform" from "sector perform."
Declining issues outnumbered advancing ones on the NYSE by 2,449 to 621, for a 3.94-to-1 ratio on the downside; on the Nasdaq, 2,093 issues fell and 653 advanced for a 3.21-to-1 ratio favoring decliners.
The S&P 500 was posting 5 new 52-week highs and 7 new lows; the Nasdaq Composite was recording 47 new highs and 75 new lows. (Additional reporting by Tanya Agrawal; Editing by Savio D'Souza and Nick Zieminski)