* Wal-Mart surges as results beat estimates
* Fed minutes suggest possibility of June rate hike
* NY Fed's Dudley says June, July hike "reasonable"
* Indexes down: Dow 0.86 pct, S&P 0.84 pct, Nasdaq 1.06 pct (Adds details, updates prices)
By Yashaswini Swamynathan and Tanya Agrawal
May 19 (Reuters) - The S&P 500 and Dow touched two-month lows on Thursday, a day after hawkish comments from the Federal Reserve suggested interest rates could be hiked as early as June.
Minutes of the Fed's April meeting, released on Wednesday, caught the market by surprise as they showed that most policymakers thought a June rate hike was appropriate, given continued improvement in the U.S. economy.
New York Fed President William Dudley said on Thursday that June is definitely a "live" meeting and that a rate hike in June or July is a reasonable expectation.
"We are on track to satisfy a lot of the conditions" for a rate increase, said Dudley, a voting member of the central bank's policy setting committee. The Fed meets on June 14-15.
Prices for contracts on the Fed funds rate implied investors saw a 26 percent chance of a June rate increase, up from 19 percent before the minutes were released, according to CME Group.
Data showed the number of Americans filing for unemployment aid fell from a 14-month high last week, the latest sign the economy was picking up speed in the second quarter.
"The main driver of what's going on, is the Fed. The market had believed that there may be one rate hike and certainly they had taken June off the table," said Ernie Cecilia, chief investment officer of Bryn Mawr Trust.
"I think that (the market) had become complacent."
At 12:50 p.m. ET (1650 GMT), the Dow Jones industrial average was down 150.21 points, or 0.86 percent, at 17,376.41, the S&P 500 was down 17.17 points, or 0.84 percent, at 2,030.46 and the Nasdaq Composite was down 50.31 points, or 1.06 percent, at 4,688.81.
Crude oil prices fell more than 2 percent on Thursday as the dollar's surge on rate hike expectations drove players from the oil market.
The dollar index jumped to a two-month high against a basket of major currencies.
Eight of the 10 major S&P sectors were lower, with the industrials index's 1.7 percent fall leading the decliners.
General Electric's 1.3 percent fall was the biggest drag on the index on which only two stocks were up.
Dow component Wal-Mart's shares surged 9 percent to $68.71 after the retailer reported first-quarter results that beat analysts' estimates.
Cisco Systems was up 3.2 percent at $27.57 after the network equipment maker reported better-than-expected results.
Monsanto was up 5 percent at $102.03 after disclosing German group Bayer has made an unsolicited takeover proposal.
Declining issues outnumbered advancing ones on the NYSE by 2,406 to 578. On the Nasdaq, 2,082 issues fell and 612 advanced.
The S&P 500 index showed 5 new 52-week highs and 4 new lows, while the Nasdaq recorded 11 new highs and 66 new lows. (Reporting by Yashaswini Swamynathan; Editing by Don Sebastian)