* North Korea conducts fifth nuclear test
* Fed's Rosengren says increasingly risky to delay rate hike
* Energy shares fall as oil retreats
* Indexes down: Dow 1.6 pct, S&P 1.8 pct, Nasdaq 2.0 pct (Updates to late afternoon)
By Chuck Mikolajczak
NEW YORK, Sept 9 (Reuters) - U.S. stocks sold off on Friday, putting the S&P 500 on pace for its worst day in over two months as investor nervousness increased following a nuclear test by North Korea and comments by Federal Reserve officials that hinted at a U.S. interest rate hike.
North Korea conducted its fifth and biggest nuclear test on Friday and said it had mastered the ability to mount a warhead on a ballistic missile, drawing condemnation from the United States as well as China, Pyongyang's main ally.
There was further pressure on the U.S. equity market after Boston Fed President Eric Rosengren, a historically dovish policymaker, said the U.S. central bank faced increasing risks if it waited too much longer to raise interest rates. He said a gradual monetary policy tightening was likely appropriate, although he added the Fed was unlikely to raise rates too rapidly.
But Fed Governor Daniel Tarullo, also a voting member, was more cautious and said on Friday in an interview with CNBC he wanted to see more evidence of U.S. inflation rising back toward the Fed's 2 percent target, although he would not discount the possibility of a hike this year.
"There are lots of reasons for people to get nervous, particularly with the market at all-time highs. There's enough negative to tip things over to people taking some profits there," said Eric Kuby, chief investment officer at North Star Investment Management Corp. in Chicago.
At 2:32 p.m. ET, the Dow Jones industrial average was down 294.68 points, or 1.59 percent, to 18,185.23, the S&P 500 had lost 40.17 points, or 1.84 percent, to 2,141.13 and the Nasdaq Composite had dropped 103.21 points, or 1.96 percent, to 5,156.28.
The Fed holds its two-day policy meeting on Sept. 20-21. The perceived chances of a September rate hike climbed to 24 percent in the wake of the Fed comments, according to CME's FedWatch tool, from 18 percent the previous day.
Utilities were down 2.7 percent and telecoms down more than 2.9 percent, the worst performing of the 10 major S&P sectors. The sectors have been strong performers on the year as investors have used their high dividends as a bond proxy.
U.S. stocks have been subdued for two months, with the benchmark S&P 500 index failing to register a move of more than 1 percent on a closing basis in either direction since July 8.
U.S. wholesale inventories were unchanged in July as previously reported and sales fell, suggesting a limited boost to economic growth from restocking in the third quarter.
The energy index shares, down 2.3 percent, fell along with oil prices, as the market discounted an unexpected slump in U.S. crude inventories as a storm glitch.
Declining issues outnumbered advancing ones on the NYSE by a 16.92-to-1 ratio; on Nasdaq, a 5.77-to-1 ratio favored decliners.
The S&P 500 posted 3 new 52-week highs and 2 new lows; the Nasdaq Composite recorded 34 new highs and 30 new lows. (Additional reporting by Chuck Mikolajczak and Rodrigo Campos in New York; Editing by James Dalgleish and Chizu Nomiyama)