* Indexes down: Dow 0.2%, S&P 500 0.7%, Nasdaq 1.3%

* Netflix ( NFLX ) falls as earnings forecast disappoints Wall Street

* Intuitive Surgical ( ISRG ) falls on insurance coverage concerns

* US consumer sentiment improves in July; renewed Middle

East conflict poses downside risk

(Updates with afternoon levels)

By Ragini Mathur and Avinash P

July 17 (Reuters) - The S&P 500 and Nasdaq hit multi-week

lows on Friday as investors reassessed this year's AI-fueled

rally, triggering volatility in chip stocks, while a new AI

model from China further soured sentiment.

After a blistering run that lifted main stock indexes to

record highs, investors have started to retreat from crowded

semiconductor trades over worries about the scale of AI-related

spending.

Some of the chip stocks extended the previous session's

losses, with heavyweight Nvidia ( NVDA ) down 1.3%.

The decline, combined with an early gain in Apple ( AAPL ),

pushed the iPhone maker ahead of Nvidia ( NVDA ) to briefly become the

world's most valuable company.

The Philadelphia SE Semiconductor index fell 1% and

was set for its worst week since March. The gauge has shed more

than 20% from its late June record high.

Losses in other mega-cap stocks also weighed on markets.

Meta Platforms ( META ) fell 5.2%.

"For some of these stocks, the valuations are extremely hard

to justify without seeing a tangible product," said Louis

Kondratev, trader at XFUNDs.

"But I don't think the chip sector lost steam completely.

Right now, it's just a healthy pullback."

Chinese AI startup Moonshot unveiled Kimi K3, a 2.8

trillion-parameter model it said was the world's largest

open-weight AI, adding to investors' concerns over whether hefty

spending by heavyweights will deliver tangible results.

Chinese open-source models have raised some competitive

fears, said Angelo Kourkafas, senior global investment

strategist at Edward Jones Investments.

"Supposedly, there are some offerings rivaling the

performance of Anthropic and OpenAI... potentially that is

contributing today to some of that weakness that started in

Asia."

Shares of Netflix ( NFLX ) tumbled 9%, after the streaming

giant forecast third-quarter numbers below Street estimates on

Thursday, weighing heavily on the communication services sector

that slid 2.4%.

At 12:07 p.m. ET, the Dow Jones Industrial Average

fell 127.51 points, or 0.24%, to 52,425.46, the S&P 500

lost 56.07 points, or 0.74%, to 7,477.70 and the Nasdaq

Composite lost 335.74 points, or 1.30%, to 25,546.21.

All three main indexes were poised for weekly losses, as an

upbeat start to second-quarter earnings and benign inflation

data were overshadowed by concerns over the chip sector.

The benchmark S&P 500 touched a two-week low earlier in the

session, while the tech-heavy Nasdaq hit a three-week trough

before both trimmed some losses.

The CBOE Volatility Index, Wall Street's fear gauge,

hit its highest in more than a week. It was last up 1.08 points

to 17.80.

Fears of further escalation in conflict in the Middle East

mounted as Iran hit a power and desalination plant in Kuwait, in

response to a U.S. strike on its bridges and an airport on

Friday.

U.S. consumer sentiment, however, increased to a five-month

high in July, but it is likely temporary as renewed U.S.-Iran

tensions raise gasoline prices.

Among other movers, Intuitive Surgical ( ISRG ) shares slid

nearly 12.5% after the medical device maker kept its da Vinci

procedure-growth forecast unchanged and warned insurance-plan

changes may be delaying patient care.

Declining issues outnumbered advancers by a 1.76-to-1 ratio

on the NYSE and by a 1.73-to-1 ratio on the Nasdaq.

(Reporting by Ragini Mathur and Avinash P in Bengaluru;

Additional reporting by Sudeshna Ghoshal; Editing by Joyjeet

Das)