Updates to mid-afternoon trading

By Stephen Culp and Medha Singh

NEW YORK, June 3 (Reuters) - Wall Street stocks pulled back from record highs on Wednesday as flaring tensions in the Middle East and rising crude prices stoked inflation jitters and convinced investors to take some profits.

All three major U.S. stock indexes were dragged lower by financials .SPSY and tech .SPLRCT, with the small-cap Russell 2000 .RUT underperforming its larger-cap counterparts.

Chips .SOX gained 1.7%, indicating the artificial intelligence fervor is alive and well, although six of the Magnificent Seven group of AI-related megacaps were lower.

"The AI names are trading on their own completely separate world, largely oblivious to macro and geopolitical risk, at least within reason," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. "And so there's going to be a bid for those names, especially on days where everything else looks a little bit less attractive."

The S&P Software & Services index .SPLRCIS, battered in recent months by fears of AI disruption, dropped 3.9%.

Middle East hostilities intensified and diplomatic efforts to end the war stood at an apparent impasse after the U.S. and Iran traded a new round of air strikes, the latest test of a shaky ceasefire.

Oil prices rose, adding to worries that upward pressure on energy prices could metastasize into broader, systemic inflation.

"The market is desperate to believe the narrative that we're heading towards some sort of longer-term sustainable deal in the Middle East," Mayfield said. "And this is a market that's pretty narrow and at all-time highs so it's susceptible to any piece of that narrative falling apart."

Financial markets are pricing in a 41.8% likelihood of a rate hike at the conclusion of the U.S. Federal Reserve's December meeting, up from 9.1% one month ago, according to CME's FedWatch tool.

But New York Fed President John Williams reiterated his position that the central bank does not need to change interest rates despite upside inflation risks, stating monetary policy is "in the right place."

Economic data suggested the labor market was stable, and the services sector continued to expand, but input prices remain elevated and corporate spending plans appear soft amid rising energy costs and geopolitical uncertainties.

The Dow Jones Industrial Average .DJI fell 420.95 points, or 0.82%, to 50,886.84, the S&P 500 .SPX lost 38.40 points, or 0.50%, to 7,571.38 and the Nasdaq Composite .IXIC lost 206.28 points, or 0.76%, to 26,887.62.

Of the 11 major sectors of the S&P 500, consumer discretionary .SPLRCD and tech .SPLRCT fell the most. Energy stocks .SPNY, buoyed by oil prices, enjoyed the largest percentage gains.

Among chipmakers, Marvell MRVL.O, Intel INTC.O, Qualcomm QCOM.O, and Sandisk SNDK.O advanced between 4.2% and 6.9%.

Asset managers dropped after Switzerland's Partners Group PGHN.S capped withdrawals from an $8.6 billion private equity fund. KKR KKR.N, Blackstone BX.N, Blue Owl OWL.N and Ares Management ARES.N dropped between 4.3% and 4.9%.

GameStop GME.N advanced 6.7% after the original meme-stock posted a rise in quarterly revenue and unveiled a $2 billion share buyback program.

Elon Musk's SpaceX plans to price its IPO at $135 a share to raise a record $75 billion, a source familiar with the matter told Reuters on Tuesday.

Broadcom AVGO.O was up 1.0% ahead of its results, expected after the bell.

Declining issues outnumbered advancers by a 2.55-to-1 ratio on the NYSE. There were 234 new highs and 154 new lows on the NYSE.

On the Nasdaq, 1,301 stocks rose and 3,440 fell as declining issues outnumbered advancers by a 2.64-to-1 ratio.

The S&P 500 posted 32 new 52-week highs and 18 new lows while the Nasdaq Composite recorded 83 new highs and 124 new lows.