* U.S. housing starts rise, permits at 4-1/2 year high
* Cyprus aims to exempt small savers from deposit tax
* Futures: S&P up 3.5 pts; Dow up 20 pts; Nasdaq off 10.75 pts
By Angela Moon
NEW YORK, March 19 (Reuters) - U.S. stock index futures rose on Tuesday, helped by signs that the U.S. housing market recovery is gathering pace, as investors shrugged off developments in Cyprus that may lead the country into default.
Futures were initially lower ahead of a crucial vote in Cyprus amid uncertainty over whether the nation's troubles would have a wider impact in the euro zone. But the losses were soon erased as buyers took the previous 2-day decline as an opportunity to get back into the market.
Data showed groundbreaking to build new U.S. homes rose in February and new permits for construction rose to their highest level since 2008, a sign the nation's housing market recovery is gathering steam.
"The data was good but at the same time we need to think about, now that the housing market is getting better, will the Fed have to wait longer to get their foot off the gas pedal?" said Joe Saluzzi, co-head of trading at Themis Trading.
"But the market certainly doesn't thinks so and it's also shrugging off the Cyprus situation. It seems like the mentality is 'don't you dare get in front of this rally.'"
S&P 500 futures added 3.5 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures added 20 points and Nasdaq 100 futures gained 10 points.
Cyprus's parliament was set to reject a divisive tax on bank deposits in a vote scheduled for Tuesday, a government spokesman said. The government has proposed to spare small savers from the tax in a bid to win parliamentary backing for an international bailout and avoid default and a banking collapse.
A weekend announcement that Cyprus would break with previous practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) EU bailout prompted some turmoil on European financial markets on Monday.
Citigroup Inc agreed to pay $730 million to settle a class action lawsuit on behalf of investors who said they were misled by the company's disclosures. The stock was up 0.6 percent in premarket trade.
Drugmaker Affymax Inc said it was considering selling itself or filing for bankruptcy among a range of alternatives, as it struggles to stay afloat following the recent recall of its sole commercial product, the anemia drug Omontys. The stock plunged 57.5 percent to $1.23.
BlackRock Inc, the world's largest money manager, will lay off nearly 300 employees, or about 3 percent of its workforce, according to an internal memo obtained by Reuters.
Boeing Co technical workers voted by a wide margin to ratify a new four-year labor agreement, ending the possibility of a strike that could have cut production at a critical time for the aircraft maker.