* Commodities fall on China demand concerns
* U.S. consumer spending rises more than expected in Aug
* Alcoa jumps after company says to split up
* Indexes down: Dow 1.28 pct, S&P 1.68 pct, Nasdaq 1.96 pct (Adds quote, updates prices)
By Abhiram Nandakumar
Sept 28 (Reuters) - U.S. stocks were sharply down in afternoon trading on Monday, set for their worst third quarter in four years, as investors worried about the health of China's economy and its impact on the timing of a U.S. interest rate increase.
All three major indexes were down more than 1 percent in volatile trading.
The S&P materials sector led the decliners as prices of commodities fell after Chinese data showed an 8.8 percent decline in profits at industrial companies.
Healthcare stocks continued to remain weak since last week, when Democratic presidential candidate Hillary Clinton criticized drug pricing.
"The broad healthcare sector and China are hurting the market. It's time for risk-off and there's no place to hide," said Richard Weeks, managing director at HighTower Advisors in Vienna, Virginia.
In U.S. data, consumer spending in August rose more than expected, adding to the case for an interest rate increase this year.
Federal Reserve Chair Janet Yellen said last week she expects rates to be raised this year. New York Federal Reserve President William Dudley on Monday added to the expectations of an early rate increase, suggesting the central bank could pull the trigger as soon as in October.
Several other Federal Reserve officials are scheduled to speak during the week, including Yellen on Wednesday.
The Fed held off from raising rates at its September meeting, citing concerns about the health of the global economy among other factors.
"(The Fed) is concerned that the decelerations of global GDP will have a significantly higher effect on the U.S. than the markets are pricing," said Omar Aguilar, chief investment officer of equities at Charles Schwab Investment Management in San Francisco.
Investors will keep a close eye on data this week, with September non-farm payrolls data scheduled to be released on Friday.
At 11:54 a.m. ET (1554 GMT), the Dow Jones industrial average was down 208.42 points, or 1.28 percent, at 16,106.25, the S&P 500 was down 32.42 points, or 1.68 percent, at 1,898.92 and the Nasdaq composite index was down 91.84 points, or 1.96 percent, at 4,594.66.
"What we have here is a jittery market, and with two days left to the quarter I don't see much of a change in direction," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
"I think the markets will continue to hold the low end of the trading range."
The CBOE Volatility index, known as Wall Street's "fear gauge", jumped 12 percent to 26.35, firmly above its long-term average of 20.
Alcoa's shares were up 4.2 percent at $9.45 after the aluminum producer said it would split into two publicly traded companies.
Apple fell 1.3 percent to $113.20 despite reporting that it sold a record number of its new iPhones in the first weekend on the market.
Media General soared 23.50 percent to $13.77 after Nexstar offered to buy the company in a deal valued at $4.1 billion. Nexstar was up 1.2 percent at $45.04.
Declining issues outnumbered advancing ones on the NYSE by 2,623 to 384. On the Nasdaq, 2,153 issues fell and 581 advanced.
The S&P 500 index showed no new 52-week highs and 65 new lows, while the Nasdaq recorded six new highs and 264 new lows. (Reporting by Abhiram Nandakumar and Sweta Singh in Bengaluru; Editing by Savio D'Souza and Saumyadeb Chakrabarty)