(Recasts, adds comments, updates futures, adds housing starts)
By Denise Duclaux
NEW YORK, March 18 (Reuters) - Stocks are seen rising at Tuesday's opening bell on continued bets for a swift and decisive U.S. victory over Iraq, but a report showing a steep drop in housing starts curbed some of that new-found enthusiasm.
Groundbreaking on new homes slowed sharply in February, as harsh winter weather unexpectedly pulled housing starts to their lowest level since April 2002, the government said. The Commerce Department said starts fell to a seasonally adjusted 1.622 million annual rate. The 11 percent drop was the largest one-month percentage drop since January 1994.
The report fed concerns over the nation's economic health and helped take a bit of the luster off anticipation for a quick war in Iraq. U.S. forces are preparing to invade after President George W. Bush gave Saddam Hussein and his sons 48 hours to flee the country.
"We did have some sour economic numbers come out in the housing sector," said Peter Cardillo, chief strategist and director of research at Global Partners Securities. "The market has been rallying on hopes that war is going to be somewhat quick, but the fact is we have not yet begun military intervention. The market is going up on short-lived war, but the reality is we really don't know that yet."
Equity futures eased off their highs but still pointed to a higher open. The June S&P 500 futures were up 6 points to 867, the June Nasdaq futures rose 8 points at 1,082, and the June Dow futures added 58 points at 8,160. The Nasdaq 100 pre-market indicator rose 0.31 percent.
FED TAKES BACKSEAT, SOME QUESTION RALLY
The meeting of Federal Reserve policy-makers on Tuesday is expected to take a back seat as the threat of war consumes Wall Street. With interest rates at historic lows and the Fed running out of monetary ammunition, most dealers expect the central bank to hold rates steady, but to adjust its balance of risk assessments toward economic weakness. The Fed is expected to announce its decision at about 2:15 p.m. (1915 GMT).
Some market watchers warn the market's upturn, which has pushed the Dow up 8 percent since Wednesday's close when the blue-chip gauge neared multiyear lows, may be fleeting. They caution the nation's economic recovery is lackluster even without the threat of war and that a conflict in the Middle East could also open a Pandora's box of problems.
The U.S. government put the country on the second-highest level of alert on Monday and spelled out tough new security measures, including temporary detention of some asylum-seekers, as it warned of possible attacks if America takes military action against Iraq.
P&G NABS WELLA
Consumer products maker Procter & Gamble Co. is likely to grab some attention during the session.
The Dow component on Monday after the close raised its quarterly profit outlook. The company also said it would take control of German hair care firm Wella in a $7.02 billion deal. P&G closed at $85.50.
Applied Materials Inc. , responding to the severe slump in demand for microchip-making equipment, will cut 2,000 jobs, or 14 percent of its staff, in its second major round of layoffs in five months, the company said. Applied Materials, the world's dominant maker of computer-chip production tools, ended at $13.129.
Gateway Inc. , the No. 3 U.S. personal computer maker, warned on Monday after the close that its first-quarter results would fall far below analysts' forecasts and said it would slash its work force by 17 percent in a bid to cut annual costs by over $400 million. Shares closed at $2.40.
In Monday's regular session, the blue-chip Dow Jones industrial average jumped 282.21 points or 3.59 percent to 8,141.92 and the broad Standard and Poor's 500 climbed 29.52 points, or 3.54 percent, to 862.79 -- both logging their fourth up days in a row. The tech-laced Nasdaq Composite Index rallied 51.94 points, or 3.88 percent, to 1,392.27.