* Oil plunges to seven-year lows
* Fed to decide on interest rate hike next week
* Volatility index at its highest since early October
* DuPont, Dow Chemical fall after agreeing to merge
* Indexes down: Dow 1.8 pct, S&P 2 pct, Nasdaq 2.1 pct (Updates to late afternoon, adds commentary, changes byline)
By Marcus Howard
Dec 11 (Reuters) - All three major U.S. indexes were down sharply on Friday afternoon, heading for their worst week in a month, as the price of crude oil dropped to around a seven-year low and investors braced for the first U.S. interest rate hike in nearly a decade.
Investors were nervous about making risky bets as they also worried about declines in China's yuan and high-yield debt markets after an investment fund announced the liquidation of a credit fund.
"It hasn't been any one thing today, it's been an accumulation of concerns as the week has worn on," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "Positioning has been clearly along the lines of taking risk exposure off."
At 3:18 p.m. (2018 GMT), the Dow Jones industrial average was down 319.42 points, or 1.82 percent, to 17,255.33, the S&P 500 had lost 40.21 points, or 1.96 percent, to 2,012.02 and the Nasdaq Composite had dropped 106.33 points, or 2.11 percent, to 4,938.84.
The three major indexes were on track for their worst weekly performances since mid November. The S&P 500 was heading for a 3.3 percent decline for the week, while the Dow was set for a 2.9 percent drop and Nasdaq was on track for a 3.5 percent fall.
The continued plunge in oil prices added to investor uncertainty ahead of the Federal Reserve's expected rate hike after its Dec. 15-16 meeting.
Brent futures fell to an almost seven-year low, while U.S. crude futures fell below $36 a barrel after the International Energy Agency said it expected the supply glut to worsen in 2016 as demand slows and OPEC shows no signs of slowing production.
"Until the oil market finds a support level, the market will remain unsettled," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
Adding to the somber mood, China's yuan fell to its lowest in 4-1/2 years on concerns about the country's slowing economy and expectations of a U.S. rate hike.
New York-based Third Avenue Management said Thursday it was trying to liquidate a roughly $1 billion junk bond fund in the biggest failure in the U.S. mutual fund industry since the 2008 financial crisis.
James of Wedbush said investors are worried about high-yield markets, especially as it relates to high-yield debt and energy needs.
Tracking oil prices, the S&P energy index fell 3.2 percent, leading the decliners among major S&P sectors. The index has lost 10.64 percent since the beginning of the month.
The materials index was down 2.6 percent, weighed down by DuPont and Dow.
DuPont shares were down 5.6 percent at $70.40, after it agreed to merge with Dow Chemical in a deal valuing the combined entity at $130 billion. Dow was down 2.4 percent at $53.60.
Declining issues outnumbered advancing ones on the NYSE by 2,670 to 405, for a 6.59-to-1 ratio on the downside; on the Nasdaq, 2,261 issues fell and 544 advanced for a 4.16-to-1 ratio favoring decliners.
The S&P 500 posted one new 52-week high and 40 new lows; the Nasdaq recorded 16 new highs and 168 new lows. (Reporting by Marcus Howard; Additional reporting by Tanya Agrawal; Editing by James Dalgleish)