(Recasts with Dow in correction mode, adds seven-month lows,

trading volume, market breadth)

* Carnival drops on cutting annual adjusted profit

forecast

* Megacaps biggest drag on S&P 500

* Fed's Paulson acknowledges inflation risks from war

* Indexes off: Dow 1.73%, S&P 500 1.67%, Nasdaq 2.15%

By Chuck Mikolajczak and Purvi Agarwal

March 27 (Reuters) - U.S. stocks tumbled on Friday, with

each of the three major U.S. indexes closing at their lowest

levels in over seven months and the Dow confirming it was in

correction territory as the month-long Middle East war continued

to suppress risk appetite.

Markets took little solace from U.S. President Donald Trump's

announcement that he gave Iran another 10 days to reopen the

Strait of Hormuz or face the destruction of its energy plants,

after Iran rejected his proposals to end the war that began with

U.S.-Israeli air strikes on Iran.

Secretary of State Marco Rubio said the U.S. could achieve its

objectives in Iran without the use of any ground troops and

expected its operation to conclude in a matter of weeks, despite

recent deployments of additional forces to the region.

U.S. crude settled up 5.46% at $99.64 a barrel and Brent

rose 4.22% to settle at $112.57 per barrel, but they

were little changed on the week.

The Dow, S&P 500 and Nasdaq each suffered their fifth

straight weekly decline, the longest such streak in nearly four

years.

The Dow is now down more than 10% from its February 10 record

close, becoming the latest major index to confirm a correction,

commonly defined as a drop of 10% from its prior high. The Dow

follows the Nasdaq in crossing the correction threshold while

the Russell 2000, which was the first on the correction

path, confirmed it last Friday.

"Clearly, the overall tone has turned very negative and now

we have broken down into correction territory," said Ken

Polcari, partner and chief market strategist at SlateStone

Wealth in Jupiter, Florida.

"In the end, I would view this as a big opportunity, but

would not be surprised if we see a drawdown anywhere between 15%

to 20% before it is over."

The Dow Jones Industrial Average fell 793.47 points,

or 1.73%, to 45,166.64, the S&P 500 lost 108.31 points,

or 1.67%, to 6,368.85 and the Nasdaq Composite lost

459.72 points, or 2.15%, to 20,948.36.

The CBOE Volatility Index, considered Wall Street's

fear gauge, was up 3.61 points to close at 31.05, its highest

close since April 21.

Megacaps were the biggest drag on the benchmark S&P index,

with Nvidia ( NVDA ) down 2.2% as the biggest weight, while

Amazon ( AMZN ) dropped 4%.

Software shares were also under renewed selling pressure,

and the S&P 500 software and services index closed at

its lowest level since November 6, 2023.

Along with pressure from Amazon ( AMZN ), consumer discretionary stocks

dropped 3.1%, the worst-performing of the 11 major S&P

sectors, as cruise operator Carnival slumped 4.3% after

cutting its annual adjusted profit forecast. Fellow cruise

operator Norwegian tumbled 6.9%.

The surge in oil prices along with other products such as

fertilizer as a result of the Iran war has fanned inflation

fears and dampened expectations that the Federal Reserve and

other central banks have room to lower interest rates.

Money market participants are not pricing in any easing from the

U.S. Federal Reserve this year, compared with expectations of

two cuts before the conflict broke out, according to CME's

FedWatch Tool. Markets are now pricing in a roughly 25% chance

for a hike of at least 25 basis points at the Fed's October

meeting.

Philadelphia Fed President Anna Paulson acknowledged the risks

to the economy from the war, but did not specify what it meant

for monetary policy in the near term.

U.S. consumer sentiment eased to a three-month low in March,

raising concerns about the economy due to the Middle East war.

Declining issues outnumbered advancers by a 3.38-to-1 ratio

on the NYSE and by a 3.62-to-1 ratio on the Nasdaq.

The S&P 500 posted 22 new 52-week highs and 27 new lows

while the Nasdaq Composite recorded 25 new highs and 355 new

lows.

Volume on U.S. exchanges was 18.13 billion shares, compared

with the 20.4 billion average for the full session over the last

20 trading days.