* U.S. manufacturing sector contracts in June-ISM
* Bristol-Myers to buy Amylin for about $5.3 bln
* Best Buy up on takeover expectations
* UBS cuts year-end target on S&P 500 to 1,375
* Indexes down: Dow 0.5 pct, S&P 0.3 pct, Nasdaq 0.04 pct
By Edward Krudy
NEW YORK, July 2 (Reuters) - U.S. stocks were only slightly lower on Monday as expectations of more stimulus from the Federal Reserve put a floor in the market after data showed the U.S. manufacturing sector contracted for the first time in nearly three years last month.
The Institute for Supply Management's June manufacturing index showed the U.S. factory sector suffered its first contraction since July 2009. The data from the world's biggest economy added to a picture of deteriorating business activity painted by similar surveys in Europe and China.
But even with the troubling outlook stocks where remarkably resilient, especially after posting their biggest daily gains this year in the last session. Investors said weak data points were increasing hopes that the Federal Reserve would intervene to boost the economy with more easy money policies.
"I would think that the market would be down far more than it is and I think it's because there is some underlying support from Federal policy," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia."
"Investors are unwilling to get too ahead of themselves with regard to the pressure they'll put on equity prices knowing that in the event that that comes out they could have their heads handed to them," said Luschini.
UBS cut its year-end target on the S&P 500 index to 1,375, from 1,475. The firm's equity analyst Jonathan Golub, strategist at UBS, cited deterioration in incoming U.S. economic data; the Supreme Court's healthcare ruling, which he says will contribute to greater partisanship ahead of year-end fiscal discussions; and a more contentious tone among European policymakers, despite some success at the most recent Euro summit.
The Dow Jones industrial average dropped 57.82 points, or 0.45 percent, to 12,822.27. The Standard & Poor's 500 Index dropped 3.60 points, or 0.26 percent, to 1,358.56. The Nasdaq Composite Index dropped 0.04 points, or 0.00 percent, to 2,935.01.
The next Fed policymaking meeting takes place July 31-Aug. 1
Mergers and acquisitions activity also helped plug the market. Shares in Amylin Pharmaceuticals Inc rose 8.9 percent to $30.72 after Bristol-Myers Squibb Co said it will buy biotechnology company. Shares of Bristol-Myers added 1 percent to $36.31.
Shares in Best Buy jumped 9.8 to $23.02 as takeover expectation continued around the company. On June 26, Best Buy founder Richard Schulze was reported by the Wall Street Journal to be exploring a buyout of the company in combination with Credit Suisse.
Euro zone manufacturing shrank again in June and factories are preparing for worse, according to business surveys showing jobs were cut at the fastest pace in two-and-a-half years. The data showed factories in Germany and France are succumbing to a downturn that started in southern Europe.
Manufacturing in China, the world's second-biggest economy, also worsened in June with export orders, usually an indicator of global economic health and trade flows, posting their biggest fall since December.
"This is clearly very, very troubling. It indicates that at least in the month of June the manufacturing sector of the (U.S.) economy contracted and there is meaningful evidence of, at a minimum, disinflation," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany.
Separate data showed U.S. construction spending rose to its highest level in nearly 2-1/2 years in May, but market reaction was muted.