* Windstream rallies; set to spin off assets into REIT
* Merck rises as results beat expectations, but Pfizer slips
* Herbalife shares tumble after it cuts sales outlook
* Indexes: Dow flat, S&P off 0.1 pct, Nasdaq up 0.2 pct (Updates prices, changes comment, adds Corning)
NEW YORK, July 29 U.S. stocks were little changed on Tuesday after a rally in the telecommunications sector lost steam and a lower earnings forecast from UPS weighed on sentiment.
Windstream Holdings jumped 12.8 percent to $11.88 in its busiest trading day on record after the company filed to spin off assets into a tax-efficient publicly-traded real estate investment trust.
The strategy triggered bets on long-term advantages for peers but the initial gains reversed in late morning trade. The S&P telecoms sector index rose 2.8 percent after earlier gaining as much as 5.5 percent.
"Winstream was unbelievably good at keeping this close to the vest and everybody was surprised," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. However, she said, "the rethinking of the larger telecoms becoming REITs took the wind off of the market."
Telecom stocks were still higher on bets they could also be looking for ways to reduce taxes. AT&T was up 3.3 percent to $36.83, Verizon gained 1.6 percent to $52.40, CenturyLink was up 4.3 percent to $39.33 and Frontier Communications added 11.1 percent to $6.60.
Weighing on the S&P 500, shares of UPS fell 3.4 percent to $99.14 after the world's biggest courier company slashed its earnings forecast for the year due to spending to boost capacity. The S&P industrial sector fell 0.6 percent.
Corning shares dropped 9.8 percent to $19.90 after second-quarter core earnings came in below analysts' estimates.
Dow components Merck and Pfizer reported better-than-expected results. Merck's new drugs offset declining sales of ones facing generic competition and Pfizer was helped by growing sales of its cancer medicines.
Merck shares were up 1.7 percent at $58.95 while Pfizer shed 0.4 percent to $29.97.
The Dow Jones industrial average fell less than a point to 16,981.89, the S&P 500 lost 1.84 points or 0.09 percent, to 1,977.07 and the Nasdaq Composite added 7.86 points or 0.18 percent, to 4,452.77.
U.S. consumer confidence jumped in July to a high not seen since October 2007 but single-family home prices fell 0.3 percent in May on a seasonally-adjusted basis, falling short of expectations.
The Federal Reserve began a two-day meeting on monetary policy. The Fed could make subtle yet telling changes to its policy statement due Wednesday, as it plans how and when to eventually raise interest rates.
Shares of health insurer Aetna fell 3.6 percent to $81.74, even as it reported a higher second-quarter profit helped by last year's acquisition of Medicare and Medicaid provider Coventry Health Care.
Herbalife cut its sales outlook for the year after raising it three months earlier, following billionaire investor Bill Ackman's latest round of accusations against the company last week. Shares of the weight-loss and nutrition products company slid 11 percent to $60.07. (Editing by Bernadette Baum and Nick Zieminski)