* GE falls after lowering forecast, weighs on S&P, Dow
* Microsoft at record high on strong quarterly report
* Time Warner hits 15-year high on reports of AT&T deal
* Dow down 0.25 pct, S&P down 0.16 pct, Nasdaq up 0.14 pct (Updates to afternoon)
By Yashaswini Swamynathan
Oct 21 (Reuters) - The S&P 500 and the Dow came off session lows in early afternoon on Friday, but continued to be weighed down by energy and healthcare stocks, while a record-setting rally in Microsoft kept the Nasdaq in positive territory.
Also dampening sentiment was GE, which cut its full-year revenue growth target, narrowed its profit forecast and gave a dour commentary on the economy.
GE's shares were off 1.5 percent, trading at their lowest since February and weighing on other industrials.
The energy index was off 1.1 percent, while health was down 0.9 percent. J&J and Merck 1 percent. Exxon's 1 percent decline and Schlumberger's 4 percent drop weighed on the energy index.
However, helping limit losses was a record-setting rally in Microsoft and a rise in McDonald's on the back of their strong quarterly reports.
Microsoft surged as much as 5.6 percent to an all-time high of $60.45, while McDonald was up 3.1 percent.
GE's weak report came on the heels of lackluster results from other heavyweights such as Verizon and Travelers .
"If companies cannot beat estimates in this (low-rate) environment, it raises the question of what will happen when the Fed raises rates in December," said Adam Sarhan, chief executive at Sarhan Capital.
At 12:30 p.m. ET (1630 GMT), the Dow Jones Industrial Average was down 45.02 points, or 0.25 percent, at 18,117.33.
The S&P 500 was down 3.46 points, or 0.16 percent, at 2,137.88 and the Nasdaq Composite was up 7.53 points, or 0.14 percent, at 5,249.36.
The persistent strength in the dollar, which affects the overseas income for companies also worried investors. The dollar hit an eight-month high.
"A strong dollar has become the new reality, but the question going forward is how much stronger the dollar is going to get and one of the biggest risks is the Fed raising rates," Sarhan said.
Eight of 11 major S&P 500 indexes were trading lower, with the telecom services sector falling 2.1 percent.
AT&T fell nearly 2.7 percent after the Wall Street Journal reported the wireless carrier was in advanced talks to buy Time Warner, whose stock surged 10 percent.
Reynolds surged 13.4 percent after British American Tobacco's $47 billion-offer to buy the 58 percent of the tobacco company it doesn't already own.
Declining issues outnumbered advancing ones on the NYSE by 1,556 to 1,281. On the Nasdaq, 1,509 issues fell and 1,113 advanced.
The S&P 500 index showed seven new 52-week highs and three new lows, while the Nasdaq recorded 35 new highs and 33 new lows. (Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Savio D'Souza)