US STOCKS-Wall St edges lower on UPS outlook, telecom shares rally

* UPS shares fall after outlook, weighs on transports

* Windstream rallies; set to spin off assets into REIT

* Merck (Other OTC: MKGAF - news) up as results beat expectations, but Pfizer (NYSE: PFE - news) slips

* Indexes: Dow flat, S&P off 0.1 pct, Nasdaq up 0.2 pct (Updates to afternoon trading)

By Ryan Vlastelica

NEW YORK, July 29 (Reuters) - U.S. stocks mostly fell on Tuesday as a weak outlook from UPS weighed on sentiment and pressured transportation stocks, though other corporate results capped losses in equities.

United Parcel Service (NYSE: UPS - news) shares fell 3.1 percent to $99.47 after the world's biggest courier company slashed its earnings forecast for the year due to spending to boost capacity. It also reported earnings that were below expectations.

Rival shipping company FedEx Corp was down 0.8 percent at $148.36. The Dow Jones Transportation index, which is often viewed as a proxy for business activity, fell 0.7 percent. It is about 2.3 percent away from a record closing high hit last week.

UPS is the latest bellwether name to disappoint in its results, following Amazon.com Inc and Boeing Co (NYSE: BA - news) last week. Nonetheless, this earnings season has largely been a positive for equities. With more than half the S&P 500 having reported, almost 70 percent have topped earnings expectations, according to Thomson Reuters data, well above the long-term average of 63 percent. More than 63 percent have topped revenue forecasts, above the long-term average of 61 percent.

"If we started to see more negative outlooks, that would be a reason to pause, but so far this earnings season speaks to the health of corporate America and suggests markets still have room to run," said David Lebovitz, global market strategist at J.P. Morgan Funds in New York.

Telecom stocks were by far the strongest of the day, up 2.7 percent after Windstream Holdings (NasdaqGS: WIN - news) filed to spin off assets into a tax-efficient publicly-traded real estate investment trust. The stock jumped 12.8 percent to $11.88 in its busiest trading day on record. Frontier Communications added 11.1 percent to $6.60.

The Dow Jones industrial average fell 28.61 points or 0.17 percent, to 16,953.98, the S&P 500 lost 4.13 points or 0.21 percent, to 1,974.78 and the Nasdaq Composite added 4.78 points or 0.11 percent, to 4,449.69.

The Nasdaq was boosted by biotechnology shares, with the Nasdaq Biotech index up 1.4 percent.

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 rose 1.7 percent at $58.95 while Pfizer shed 0.9 percent to $29.83.

Corning Inc (NYSE: GLW - news) dropped 9.8 percent to $19.90 after reporting earnings that came in below estimates.

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. (Editing by Meredith Mazzilli)