U.S. futures signal lower open on inflation fears

PARIS May 20 (Reuters) - U.S. stock futures fell on Tuesday, pointing to a lower open on Wall Street as strong oil prices keep inflation worries high in investors' minds and put a damper on the market's recent rally.

Oil prices steadied above $127 a barrel CLc1, within sight of their record high, with a weak dollar and strong demand from China eclipsing slackening U.S. demand.

By 1013 GMT June Dow Jones DJM8, Standard & Poor's 500 SPM8 and Nasdaq 100 futures NDM8 were all down 0.4 percent. On the earnings front, retailer Home Depot Inc (HD.N) reported a lower quarterly profit as the U.S. housing meltdown hurt sales and it took charges tied to store closures and a new-store pullback.

Home Depot shares eased 0.2 percent from their last close in Frankfurt to 18.65 euros (HD.F).

The market will also take some direction from producer price data for April at 1230 GMT. Economists expect wholesale inflation to have risen 0.4 percent, after a 1.1 percent jump in March, driven by surging food and fuel prices.

"This whole commodity run-up is not a good thing for the U.S. recovery story, and I'm surprised by how the stock market has rallied lately," said Ad van Tiggelen, senior strategist at ING Investment Management.

"I'm more worried about the effect on consumers at the end than the effect on interest rates," he said.

"Either companies keep pricing power to a certain extent, and that could delay a consumer recovery, or companies down the chain lose pricing power to a certain extent and that would be bad for margins," he said.

Microsoft Corp (MSFT.O) and Yahoo Inc (YHOO.O) will remain in the spotlight. Microsoft has proposed to buy Yahoo's search business and take a minority stake in the Web pioneer, stopping short of a full merger, a person familiar with the discussions said late on Monday.

The focus will also fall on the financial services sector, after Wachovia Corp WB.N said late on Monday it has had significant losses from a Citigroup (C.N) hedge fund, joining Fifth Third Bancorp (FITB.O), which disclosed its loss in an April lawsuit.

The day's earnings calendar also includes quarterly results from Hewlett-Packard Co (HPQ.N), and Target Corp (TGT.N).

The S&P 500 index and Dow Jones industrials eked out gains on Monday as record oil prices boosted energy shares, but the Nasdaq slipped after a chipmaker's warning about consumer spending hurt technology shares.

The Dow Jones industrial average .DJI ended up 41.36 points, or 0.32 percent, at 13,028.16. The Standard & Poor's 500 Index .SPX edged up 1.28 points, or 0.09 percent, to close at 1,426.63. The Nasdaq Composite Index .IXIC closed down 12.76 points, or 0.50 percent, at 2,516.09.

(editing by Elizabeth Fullerton)