* Commodity prices weigh on materials, energy shares
* Fed's Dudley says conditions ripe for rate hike
* Kohl's quarterly results leads rally in retailers
* PayPal hit by WSJ report on rival service by Apple
* Indexes down: Dow 1.11 pct, S&P 0.95 pct, Nasdaq 0.70 pct (Updates to afternoon)
By Noel Randewich
Nov 12 (Reuters) - U.S. stocks dropped on Thursday as cheaper commodities weighed on energy and materials stocks and comments by a Federal Reserve policymaker hinted at an interest-rate hike next month.
The rout hit all 10 major S&P sectors and pushed the Dow and S&P 500 below their 200-day moving averages.
Investors are keeping a watchful eye on whether the Fed in December will raise interest rates for the first time in nearly a decade, as is widely expected after recent strong jobs data.
In a speech on Thursday, Fed Chair Janet Yellen did not comment on the economy or the timing of a rate hike.
But New York Fed President William Dudley said "it is quite possible that the conditions the Committee has established to begin to normalize monetary policy could soon be satisfied."
Following rapid gains in October, stock investors still concerned about China's economy and the effects of a U.S. rate hike are taking money off the table, said Michael Matousek, head trader at U.S. Global Investors Inc in San Antonio, which manages about $1.3 billion.
"That's why you have some of this selloff. We're down but it's not like the sky is falling," Matousek said.
At 2:24 pm, the Dow Jones industrial average was down 1.11 percent at 17,506.16 points and the S&P 500 was 0.95 lower at 2,055.31. The Nasdaq Composite dropped 0.7 percent to 5,031.34.
Crude prices hit 2-1/2 month lows, while copper and other metal prices tumbled to multi-year lows, hurt by a strong dollar, weak Chinese data and concerns of oversupply.
The energy sector sank 1.82 percent. Chevron was down 1.94 percent, weighing the most on the S&P.
The materials sector was off 1.48 percent, hurt by a 5.8 percent fall in miner Freeport-McMoRan and a 1.60 percent drop in Dow Chemical.
Retailers were a bright spot after Kohl's reported better-than-expected quarterly net sales, sending its shares up 5.65 percent.
J.C. Penney was up about 3.99 percent. Nordstrom , which was up 1.5 percent, is scheduled to report results after the close.
Cisco, also set to report after the bell, was up 0.5 percent and was among the biggest positive influences on all three main indexes.
PayPal's shares slid 2.34 percent after the Wall Street Journal reported Apple was in talks with U.S. banks to develop a rival payment service. Apple was flat.
Declining issues outnumbered advancing ones on the NYSE by 2,411 to 625. On the Nasdaq, 2,005 issues fell and 748 advanced.
The S&P 500 index showed four new 52-week highs and 17 new lows, while the Nasdaq recorded 29 new highs and 121 new lows. (Additional reporting by Abhiram Nandakumar in Bengaluru; Editing by Savio D'Souza and Andrew Hay)