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* Alaska Air drops on Hawaiian Holdings buyout deal

* Crypto stocks surge on bitcoin rally

* Indexes down: Dow 0.25%, S&P 0.61%, Nasdaq 0.96%

Dec 4 (Reuters) -

Wall Street's main indexes fell on Monday, as investors remained cautious ahead of a slew of economic data this week that is likely to test the narrative about a cut in interest rates by the Federal Reserve early next year.

U.S. stocks kicked off December on an upbeat note, extending gains from the previous month that were driven by robust earnings and expectations that the Fed was done with its rate hiking campaign.

The benchmark S&P 500 registered its highest close of the year on Friday as remarks from Fed Chair Jerome Powell bolstered the peak rates view.

Pressuring equities on Monday were higher U.S. Treasury yields, which made returns on stocks less attractive.

Megacap names including Nvidia, Meta Platforms and Apple fell between 0.7% and 2.6%.

Traders have priced in the likelihood that the central bank will keep rates unchanged next week, with about 59% betting on rate cuts starting as soon as March 2024, according to the CME Group's FedWatch tool.

However, some analysts have cautioned that markets have been too quick to price in lower interest rates.

"It's probably going to be more like the third quarter, because the Fed has told us multiple times that it'll be high for longer and wants to make sure that inflation truly has been strangled," said Sam Stovall, chief investment strategist at CFRA Research in New York, referring to the timing of the first rate cut.

However, Stovall said a Santa Claus rally is still possible as equities rebound from a likely mid-December low due to tax loss harvesting - a process in which investors sell underperforming stocks to lock in tax benefits.

A number of economic reports through the week will provide a gauge on the interest rate path as well as the potential for a "soft landing" - where the Fed manages to bring inflation under control, while averting a recession.

Investors are awaiting readings on U.S. services sector activity and a survey on job openings, while November's non-farm payrolls report is set to grab the spotlight on Friday.

Adding to declines on Monday were renewed fears about a widening of the war between Israel and Hamas after an attack on three commercial vessels in the southern Red Sea.

Shares of Alaska Air Group dropped 17.1% after the carrier said on Sunday it would acquire peer Hawaiian Holdings for $1.9 billion, including debt. Hawaiian's shares nearly tripled in value.

At 9:38 a.m. ET, the Dow Jones Industrial Average was down 91.28 points, or 0.25%, at 36,154.22, the S&P 500 was down 28.24 points, or 0.61%, at 4,566.39, and the Nasdaq Composite was down 136.74 points, or 0.96%, at 14,168.30.

Shares of cryptocurrency firms such as Coinbase Global , Riot Platforms and Marathon Digital rose between 6% and 13%, as bitcoin crossed $40,000 for the first time this year.

Declining issues outnumbered advancers for a 1.72-to-1 ratio on the NYSE. Advancing issues outnumbered decliners by a 1.07-to-1 ratio on the Nasdaq.

The S&P index recorded eight new 52-week highs and no new lows, while the Nasdaq recorded 46 new highs and 17 new lows.

(Reporting by Amruta Khandekar and Shristi Achar A; Editing by Anil D'Silva and Pooja Desai)