* Rally may be losing steam as Egypt unrest escalates
* Indexes, sectors face resistance after runup
* Data show jobless claims drop, service sector jumps
* Indexes off: Dow 0.1 pct, S&P 0.1 pct, Nasdaq flat (Updates to early afternoon)
By Angela Moon
NEW YORK, Feb 3 (Reuters) - U.S. stocks slipped on Thursday as concerns over increasing disorder in Egypt and signs of exhaustion in the recent market rally weighed on investor sentiment.
But major indexes were well off their lows by early afternoon, possibly showing their strength to carry the rally after a minor pullback. Data pointing to a recovery in the U.S. economy also supported stocks.
"We're encouraged by the read (in data) this month, which can signal an acceleration of our recovery. That should translate into market confidence, barring any headline risk, which could include Egypt and European sovereign debt," said Paul Radeke, vice president at the Minneapolis-based KDV Wealth Management.
But many sectors faced resistance after a sharp run-up, including the PHLX Semiconductor Index which struggled to stay above 450.
The Dow Jones Transportation Average and the Russell 2000 index, which have topped out recently, were also showing signs of resistance to further gains.
The Dow Jones industrial average was down 11.88 points, or 0.10 percent, at 12,030.09. The Standard & Poor's 500 Index was down 1.86 points, or 0.14 percent, at 1,302.17. The Nasdaq Composite Index was down 1.43 points, or 0.05 percent, at 2,748.13.
Data showed the U.S. services sector grew in January at its fastest pace since August 2005, and initial claims in the latest week for state unemployment benefits fell more than expected.
In Egypt, at least six people were dead and 800 wounded after gunmen and stick-wielding supporters of President Hosni Mubarak attacked demonstrators camped out for a tenth day on Tahrir Square to demand the 82-year-old leader immediately end his 30-year rule.
Merck & Co fell 2.6 percent to $32.94 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.
Major U.S. retailers shrugged off the snowiest January in six years to post sales that blew past analyst expectations, easing concerns that consumers were tapped out after the holidays.
Retailers posted a 4.2 percent increase in sales at stores open at least a year, beating analysts' expectations for a 2.7 percent gain, according to Thomson Reuters data. Gap Inc shares were up 3.4 percent at $19.67.
The European Central Bank kept interest rates unchanged at 1 percent, as expected. ECB President Jean-Claude Trichet said that even with rising inflation, there is no threat to medium-term price stability.
(Editing by Kenneth Barry)