* U.S. producer prices fall in July, underlying inflation slows
* Disney tops Netflix on streaming subscribers, shares jump
* U.S. weekly jobless claims rise for second straight week (Adds final closing prices)
By Herbert Lash and Bansari Mayur Kamdar
NEW YORK, Aug 11 (Reuters) - The Nasdaq and S&P 500 retreated to close lower on Thursday on the realization the Federal Reserve still needs to aggressively boost interest rates to fully tame rising consumer prices despite fresh evidence of cooling inflation.
The S&P 500 closed a tad lower after earlier hitting fresh three-month highs following data that showed the U.S. producer price index (PPI) unexpectedly fell in July.
The drop in PPI raised bets in futures markets that the Fed would hike rates by 50 basis points in September instead of 75 basis points as was expected earlier in the week.
The S&P 500 and Nasdaq surged more than 2% on Wednesday after a softer-than-expected read on consumer prices. But policy-makers have left little doubt they will tighten monetary policy until inflation pressures fully abate.
With the labor market showing signs of softness as the number of Americans filing new claims for unemployment benefits rose for the second straight week, the Nasdaq turned lower as investors questioned the economy's strength.
"It was a better CPI print yesterday than expected and a better PPI print this morning than forecasted by analysts. So it fit that theme, that peak inflation has occurred as energy continues to decline," said George Catrambone, head of Americas trading at DWS Group. "But I would be concerned about a head fake."
The Dow Jones Industrial Average rose 27.16 points, or 0.08%, to 33,336.67, while the S&P 500 slid 2.97 points, or 0.07%, to 4,207.27 and the Nasdaq Composite dropped 74.89 points, or 0.58%, to 12,779.91.
Volume on U.S. exchanges was 12.36 billion shares, compared with the 11.06 billion average for the full session over the past 20 trading days.
Six of the 11 major S&P 500 sectors declined, with health care leading. Energy rose 3.2% to lead gainers and help value stocks advance 0.4% as growth shares fell 0.5%.
Banks extended their rally with Goldman Sachs and JPMorgan Chase & Co rising 1.1% and 1.5%, respectively.
Benchmark U.S. Treasury yields hit more than two-week highs as bond investors bet the Fed will press on with hiking rates as inflation is still hot, even though price pressures have eased a bit.
Demand, as seen by an almost 9% increase in aggregate spending power, is still too strong and may lead the Fed to stay aggressive longer than many hope, said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.
"We're becoming a little more worried because the Fed might have to do a little bit more work to try to cool that excess demand side of the equation," Janasiewicz said.
High-growth stocks that had rallied on Wednesday fell, Tesla Inc down 2.6% and Amazon.com Inc off 1.5%.
Despite its recent bounce of mid-June lows, the tech-heavy Nasdaq is down about 18% so far this year as fears of an aggressive monetary policy have sapped appetite for equities, particularly high-growth stocks.
The U.S. central bank has raised its policy rate by 225 basis points since March as it battles to cool demand without sparking a sharp rise in layoffs.
In earnings-driven news, Walt Disney jumped 4.7% as the media giant edged past rival Netflix Inc with 221 million streaming customers and announced it will increase prices for customers who want to watch Disney+ or Hulu without commercials.
Bumble Inc fell 8.6% on cutting its full-year revenue forecast, taking a hit from the Ukraine war, while also grappling with competition from rival Match Group Inc in the online dating market.
Advancing issues outnumbered declining ones on the NYSE by a 1.54-to-1 ratio; on Nasdaq, a 1.25-to-1 ratio favored advancers.
The S&P 500 posted four new 52-week highs and 29 new lows; the Nasdaq Composite recorded 69 new highs and 22 new lows. (Reporting by Herbert Lash, additional reporting by Bansari Mayur Kamdar and Aniruddha Ghosh in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)