US STOCKS-Market set to fall after Yahoo bid dropped

By Jennifer Coogan

NEW YORK, May 5 (Reuters) - U.S. stocks looked set to open lower on Monday after Microsoft Corp (MSFT.O) dropped its bid for Yahoo Inc (YHOO.O), clouding the outlook for mergers and acquisitions and sending Yahoo shares down more than 21 percent.

Yahoo was trading at $22.50 before the market's open compared with a Friday closing price of $28.67 after software maker Microsoft offered to increase its bid to $47.5 billion on Saturday, but that still wasn't enough for the Internet company.

But in another possible deal, Sprint Nextel's (S.N) shares rose 10.3 percent to $8.70 after media reports said Deutsche Telekom (DTEGn.DE) was looking at a possible purchase of the U.S. wireless company.

Microsoft initially offered $31 per share for Yahoo, then $33, but Microsoft withdrew from the talks when Yahoo Chief Executive Jerry Yang dug in for a price of $37 a share.

Microsoft shares rose 5.9 percent to $30.96 on Monday.

"It's going to be a tug-of-war. Yahoo's down to $22, but you've got Microsoft trading up a dollar and a half," said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Connecticut. "It's clearly going to weigh down the Nasdaq because Yahoo's a component."

S&P 500 futures SPc1 were down 6.8 points, below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures DJc1 fell 48 points, and Nasdaq 100 NDc1 futures dropped 11.25 points.

Shares of Google Inc (GOOG.O), a competitor of both Yahoo and Microsoft, rose on expectations the company could benefit from the failure of the Microsoft-Yahoo talks. Yahoo was likely to push for an advertising partnership with the Web search company, sources familiar with the matter said. Google rose 3.8 percent to $603.50.

An index of the huge U.S. services sector in April is due at 10 a.m. (1400 GMT) from the Institute for Supply Management. Economists in a Reuters survey forecast a PMI reading of 49.1 versus 49.6 in March. A reading below 50 indicates contraction in the sector.

On Friday, the Dow Jones industrial average .DJI was up 48.20 points, or 0.37 percent, at 13,058.20. The Standard & Poor's 500 Index .SPX was up 4.56 points, or 0.32 percent, at 1,413.90. The Nasdaq Composite Index .IXIC was down 3.72 points, or 0.15 percent, at 2,476.99. (Editing by Kenneth Barry)