* NY Fed President Dudley says Sept rate hike possible
* Dollar index drops 0.74 pct
* CPI index flat in July vs 0.2 pct rise in June
* Indexes down: Dow 0.32 pct, S&P 0.31 pct, Nasdaq 0.33 pct (Updates to open)
By Yashaswini Swamynathan
Aug 16 (Reuters) - Wall Street was sharply lower on Tuesday morning, with indexes pulling away from record levels, after New York Federal Reserve President William Dudley said an interest rate in September was possible.
"The labor market is getting tighter and we're starting to see signs of wage gains starting to accelerate, so I think we're getting closer to that point in time when it will be appropriate to actually raise short-term rates again," Dudley, a permanent voting member of the Federal Reserve, said in an interview on Fox Business Network.
Dudley's comments raised expectations among traders of an interest rate hike this year - they now see a 12 percent chance of a hike in September, up from 9 percent before Dudley's comments.
That measure increased to 37.8 percent from 37.4 percent for December, according to CME Group's FedWatch tool.
The dollar pared earlier losses, but remained near its lowest level this month, after Dudley's comments.
Investors will pore over the minutes of the Fed's July policy meeting, scheduled for release on Wednesday, for clues on the central bank's rate plans after a blowout June jobs data.
However, data on Tuesday showed U.S. consumer prices were unchanged in July as the cost of gasoline fell for the first time in five months and underlying inflation moderated.
The Fed has a 2 percent inflation target and tracks an inflation measure which has been stuck at 1.6 percent since March.
"What we are seeing here is a market that is technically overbought and is looking for some sort of an excuse to pause a bit," said Peter Cardillo, chief market economist at First Standard Financial in New York.
At 9:34 a.m. ET (1334 GMT), the Dow Jones Industrial Average was down 59.24 points, or 0.32 percent, at 18,576.81, the S&P 500 index was down 6.81 points, or 0.31 percent, at 2,183.34 and the Nasdaq Composite index was down 17.41 points, or 0.33 percent, at 5,244.61.
Nine of the 10 major S&P 500 indexes were lower, with the energy sector's 0.63 percent decline being the biggest.
The materials index was the only gainer, rising 0.53 percent on the back of a weaker dollar.
Dow component Home Depot's shares rose 0.5 percent after the company raised its full-year earnings forecast.
Hain Celestial plunged 29 percent after the company said it would delay the release of its fourth-quarter results following an internal probe into its accounting.
TJX fell 3.3 percent after the company forecast current-quarter profit below estimates.
Declining issues outnumbered advancing ones on the NYSE by 1,744 to 846. On the Nasdaq, 1,513 issues fell and 723 advanced.
The S&P 500 index showed three new 52-week highs and no new lows, while the Nasdaq recorded 26 new highs and six new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty)