* Investors cautious before Fed monetary policy meeting
* Homebuilders up after rise in August housing starts
* Indexes down: Dow 0.2 pct, S&P 0.4 pct, Nasdaq 0.3 pct (Updates to afternoon)
By Edward Krudy
NEW YORK, Sept 21 (Reuters) - U.S. stocks slipped on Tuesday as caution before the results of the Federal Reserve's monetary policy meeting kept traders on the sidelines after the S&P 500 broke out of a trading range in the prior session.
After the Fed's August meeting, the U.S. central bank issued a bleak assessment of the economy and the S&P 500 tumbled more 4 percent over the next four days. Investors are hoping that improved economic data since then will mean a more upbeat outlook.
"Their willingness to pull out all the stops implied a sense of panic among Fed policy makers and that unfortunately spread," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "They need to express a stronger sense of confidence that this economic malaise will improve."
Ablin said a statement that showed the right degree of confidence and preparedness could boost stocks.
The Dow Jones industrial average edged 17.37 points, or 0.16 percent, lower to 10,736.25. The Standard & Poor's 500 Index fell 4.08 points, or 0.36 percent, to 1,138.63. The Nasdaq Composite Index slipped 6.97 points, or 0.30 percent, to 2,348.86.
Investors' caution came a day after the S&P 500 broke through a key technical range to close at a four-month high. The S&P 500 has gained about 9 percent in the last four weeks, but some analysts are unconvinced by Monday's breakout above 1,130.
"A breakout usually begets a further rally and today we're not seeing much momentum at all, plus the volume is anemic so you can't read too much into it," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
The Fed is expected to renew a promise to keep its portfolio from shrinking but not take any steps to ease monetary policy. Some investors believe a string of positive economic data has given the Fed room for maneuver.
"The latest incoming data gives the Fed a little bit more leeway," said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio. "Any economic projections or the breakdown in the vote of the committee members will be what most investors will be looking at."
Sectors that had rallied recently, including technology and materials shares, gave back some gains on Tuesday.
Dow components Cisco Systems Inc was down 0.8 percent at $21.58 and Microsoft Corp fell 0.8 percent to $25.23.
Alcoa Inc, the largest U.S. aluminum producer, fell 2.2 percent to $11.12, while big oil companies were weak as crude gave up some of its gains from the last session. Chevron Corp dipped 0.8 percent to $79.26.
U.S. housing starts increased in August to their highest level in four months, while permits for future construction rose, suggesting the embattled housing market was starting to stabilize.
The Dow Jones home construction index added 0.4 percent, and homebuilder D.R. Horton Inc rose 0.4 percent at $11.00.
Airline shares rose, with the ARCA airline index adding 1.2 percent and rising to a 34-month high. A trade group forecast global airlines will likely post sharply higher 2010 profits.
Credit Suisse downgraded Whole Foods Market Inc, saying sales at the upscale grocer are slowing and the company might miss its own comparable sales forecasts. The shares slipped 2.5 percent to $37.21.
(Reporting by Edward Krudy; Editing by Kenneth Barry)