(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window.)

* Goldman shares drop 7% as profit hit by weaker trading

* Benchmark U.S. Treasury yields jump to two-year highs

* Activision soars on $68.7 billion Microsoft deal

* Indexes down: Dow 1.45%, S&P 1.73%, Nasdaq 2.24% (Updates with mid-afternoon trading)

Jan 18 (Reuters) - Wall Street's main indexes fell sharply on Tuesday as weak results from Goldman Sachs weighed on financial stocks and tech shares continued their sell-off to start the year as U.S. Treasury yields rose to milestones.

Goldman Sachs https://www.reuters.com/business/finance/goldman-sachs-profit-misses-estimates-weak-equity-trading-2022-01-18 shares fell 7.3% after the investment bank missed quarterly profit expectations amid weak trading activity. Financials were the biggest-declining S&P 500 sector, falling 2.4%.

Benchmark U.S. Treasury yields jumped to two-year highs and two-year yields breached 1% as traders prepared for the Federal Reserve to be more aggressive in tackling unabated inflation.

The steep ascent in yields to start 2022 has weighed in particular on tech and growth stocks, whose future expected cash flows are discounted more sharply as yields rise.

“The hot inflation prints have spooked the market that the Fed is going to move and so we are seeing this rise in yields,” said Mona Mahajan, senior investment strategist at Edward Jones.

"It’s not only the rise in yields but the rapid rise in yields ... that really does cause some indigestion in the market, but particularly in growth, higher valuation, more speculative asset classes,” Mahajan said.

The Dow Jones Industrial Average fell 520.39 points, or 1.45%, to 35,391.42, the S&P 500 lost 80.55 points, or 1.73%, to 4,582.3 and the Nasdaq Composite dropped 334.31 points, or 2.24%, to 14,559.44.

All 11 major S&P 500 sectors were trading lower with the heavyweight tech sector down 2.1%.

Declines in megacap stocks, including Microsoft, Apple and Amazon, weighed most on the S&P 500 among individual shares.

A BofA survey showed that fund managers had cut their overweight positions in tech to their lowest levels since 2008, while another survey by Deutsche Bank found that a majority of respondents believed U.S. technology stocks are in bubble territory.

The Nasdaq fell as much as 9.5% below its Nov. 19 closing record. To confirm a correction the index would need to close 10% or more below the record close.

"We're having a repricing going on as the market prepares for interest rate hikes and we still have a bit of a ways to go to prepare for three rate hikes or four rate hikes," Michael O’Rourke, chief market strategist at JonesTrading. "We haven't priced that in."

Investors are zeroing in on next week's Fed policy meeting for more clarity on central bankers' next moves to rein in inflation. Data last week showed U.S. consumer prices increased solidly in December, culminating in the largest annual rise in inflation in nearly four decades.

In company news, Activision shares jumped 25% after Microsoft announced a deal to buy the video-game maker for $68.7 billion. Shares of other video game companies rose, with Electronic Arts up 4.5% and Take-Two Interactive Software up 2.2%. Microsoft shares fell 2%.

Declining issues outnumbered advancing ones on the NYSE by a 6.32-to-1 ratio; on Nasdaq, a 4.90-to-1 ratio favored decliners.

The S&P 500 posted 32 new 52-week highs and eight new lows; the Nasdaq Composite recorded 63 new highs and 534 new lows.

(Reporting by Bansari Mayur Kamdar, Shreyashi Sanyal, Sruthi Shankar in Bengaluru, Sinéad Carew in New York and Danilo Masoni in Milan; Editing by Maju Samuel and Lisa Shumaker)