* U.S. manufacturing sector contracts in June
* Investors speculate weak data could spur Fed action
* Bristol-Myers to buy Amylin for about $5.3 bln
* Best Buy up on takeover expectations
* Indexes: Dow off 0.4 pct, S&P off 0.2 pct, Nasdaq up 0.04 pct
By Edward Krudy
NEW YORK, July 2 (Reuters) - U.S. stocks were 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.
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 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 were resilient, especially after posting their biggest daily gains this year on Friday. Investors said weak data increased 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."
Luschini said investors are unwilling to bid stocks down too much in case Fed action sparked a rally in equity prices. "They could have their heads handed to them," he said.
But in a sign of fading expectations for the stock market, 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, cited deterioration in the U.S. economy; the Supreme Court's healthcare ruling, which he says will mean greater partisanship ahead of important budget debates; and a more contentious tone among European policymakers.
The Dow Jones industrial average dropped 51.77 points, or 0.40 percent, to 12,828.32. The Standard & Poor's 500 Index fell 2.52 points, or 0.19 percent, to 1,359.64. The Nasdaq Composite Index gained 1.12 points, or 0.04 percent, to 2,936.17.
The next Fed policymaking meeting takes place July 31-Aug. 1. Investors are also eyeing the European Central Bank's meeting on Thursday to see if it will lower interest rates below 1 percent. Economists are split on the likelihood of such a move.
The poor ISM numbers are not necessarily an immediate bearish signal for stocks. When the index fell below 50 in January 2007, crossing the dividing line between expansion and contraction, the S&P 500 took more than eight months to peak, hitting an all time high in October.
Mergers and acquisitions activity also helped to limit market losses. Shares in Amylin Pharmaceuticals Inc rose 8.8 percent to $30.70 after Bristol-Myers Squibb Co said it will buy biotechnology company. Shares of Bristol-Myers fell 0.3 percent to $35.85.
Shares in Best Buy jumped 10 to $23.06 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.
Finland and the Netherlands, the euro zone's most hardline creditor states, cast the first doubts on a European summit deal designed to save Spain and Italy from being engulfed by the currency bloc's debt crisis.
The summit deal, which cleared the way for using emergency EU funds to buy sovereign debt on the secondary market, helped spark a 2.5 percent rally in the S&P 500 index on Friday.
UBS was not alone in making bearish statements about the U.S. equity market. Morgan Stanley said the second quarter earnings season is likely to disappoint when it begins with Alcoa Inc next week.
"By now it is clear that the U.S. earnings season will be softer than was forecast a couple of months ago," wrote the firm's U.S. equity strategist Adam Parker in a research note.
"We would not be surprised to see negative pre-releases this week or notably weak guidance for October beginning the following week."
Euro zone manufacturing shrank again in June and factories are preparing for worse, according to business. Manufacturing in China, the world's second-biggest economy, also worsened in June with export orders.