US SMALL/MIDCAPS-Stocks bounce off lows, but utilities weigh

NEW YORK May 25 (Reuters) - Mid- and small-cap stocks staged a late rally to close slightly lower on Tuesday, after getting battered earlier in the session on a massive flight from risk as worries about the global economy intensified.

Nervous investors sold equities across the board earlier in the session, on worries over Europe's banking sector and as short-term funding costs soared.

The S&P small- and midcap indexes hit their session lows in the first 15 minutes of trading, both falling more than 3.5 percent.

"We bought a few things this morning, so maybe there were others (also) thinking this was getting a little overdone," said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management in Minneapolis.

"There's some stocks that their fundamentals are still good, that Europe doesn't matter to them," he said.

Indexes closed at or near session highs but were still lower.

Among the top drags were shares of utility companies, weighed by a 10 percent drop in UIL Holdings Corp (UIL.N) to $24.02 after it agreed to buy three gas utilities from the U.S. unit of Spain's Iberdrola SA (IBE.MC) for nearly $1.3 billion in cash, including debt. [ID:nSGE64O0GE].

The S&P small-cap utilities index .6GSPU fell 1.7 percent.

The S&P MidCap 400 index .MID lost 0.12 percent while the S&P SmallCap 600 index .SML fell 0.44 percent.

In comparison, the benchmark S&P 500 .SPX eked out a 0.04 percent gain, also after a late-day comeback.

Among the day's biggest losers were AAR Corp (AIR.N) shares, down 17.2 percent at $18.26 a day after the aviation and defense supplier forecast fourth-quarter earnings below market estimates.

Arkansas Best Corp (ABFS.O) shares tumbled 14.4 percent to $22.26 after announcing late on Monday that union employees of its subsidiary ABF Freight System voted down proposed changes to their contract, which included a 15 percent reduction to union wages. (Reporting by Rodrigo Campos; Editing by Jan Paschal)