* FOMC begins two-day meeting on Tuesday
* Exxon, Chevron fall on lower oil prices
* Yahoo drops after agreeing to sell core assets to Verizon
* Indexes down: Dow 0.62 pct, S&P 0.58 pct, Nasdaq 0.32 pct (Updates to early afternoon)
By Yashaswini Swamynathan
July 25 (Reuters) - U.S. stocks slipped from their record levels on Monday as oil weighed on energy shares and as investors awaited this week's Federal Reserve monetary policy meeting.
Oil prices fell to two-and-a-half month lows amid worries that a global glut of crude and refined products would be a drag on markets for some time.
The S&P energy index fell 2 percent, its biggest percentage decline since June 27 when Britain's vote to leave the European Union sparked a massive selloff in risk assets.
The index was the worst performer among the 10 major S&P sectors that were trading lower.
Exxon's shares fell 1.8 percent and were the biggest drag on the S&P, while Chevron's 2.3 percent decline had a similar effect on the Dow.
"Second-quarter earnings have come in stronger than we had expected, but for some reason the markets have chosen to obsess about oil prices today," said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
"It is almost as if the markets can hold only one thought in its head."
Low expectations of rate hikes, robust economic data and higher-than-expected second-quarter earnings have fueled a record-setting rally on Wall Street in the past two weeks.
Investors are now pinning their hopes on an improvement in corporate earnings to justify the market's valuation.
Earnings of S&P 500 companies are expected to fall 3.7 percent, compared with a 5 percent decline expected at the start of the earnings season, according to Thomson Reuters data.
At 12:26 p.m. ET (1626 GMT), the Dow Jones Industrial Average was down 115.66 points, or 0.62 percent, at 18,455.19.
The S&P 500 was down 12.56 points, or 0.58 percent, at 2,162.47.
The Nasdaq Composite was down 16.24 points, or 0.32 percent, at 5,083.93.
The S&P and the Dow are just 0.6 percent shy of their intraday record highs.
The Federal Open Market Committee (FOMC) will begin its two-day meeting on Tuesday to decide whether the U.S. economy could absorb a rate increase in the near term. The committee is scheduled to announce its decision on Wednesday at 2:00 p.m. ET.
Even with recent data pointing to the U.S. economy being on strong footing, the Fed is still cautious about pulling the trigger due to global uncertainty sparked by the Brexit vote.
Traders have priced in a 14.7 percent chance of a rate hike in September and a 38.5 percent chance in December, according to CME Group's FedWatch tool.
Yahoo's shares fell 2.4 percent to $38.43, after agreeing to sell its core internet business to Verizon for $4.8 billion. Verizon's shares fell 0.7 percent.
Apple shares fell 1.3 percent after CNBC reported that BGC cut the stock to "sell" ahead of the company's earnings report on Tuesday.
Declining issues outnumbered advancing ones on the NYSE by 1,921 to 968. On the Nasdaq, 1,761 issues fell and 991 advanced.
The S&P 500 index showed 24 new 52-week highs and no new lows, while the Nasdaq recorded 68 new highs and 15 new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D'Silva)