US STOCKS-Indexes flat as investors pause, deals cheer

* Investors buoyed by M&A activities

* Wal-Mart offers $4 billion for South Africa's Massmart

* VIX futures may be overbought, signals warning: analyst

* Stocks: Dow flat, S&P flat, Nasdaq up 0.1 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates to late afternoon trade, changes byline)

By Angela Moon

NEW YORK, Sept 27 (Reuters) - U.S. stocks were little changed on Monday as investors took a break after a four-week rally, but a flurry of merger and acquisition news fed optimism.

Defying September's track record of being the worst month for stocks, Wall Street was on track for one of the best months in decades, having notched its fourth week of gains on Friday.

"Today's pause was much needed after such a strong rally. If we get decent news from here, we could be looking at going beyond April highs of 1,217 to 1,219 on the S&P," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Several business deal announcements gave a lift to sentiment as they often signal that companies see value in the market.

Consumer goods group Unilever Plc plans to buy U.S. hair care group Alberto Culver Co for $3.7 billion. Alberto Culver surged 20.3 percent to $37.88, while Unilever's New York-traded stock added 1.4 percent to $28.97. For details see [ID:nLDE68Q07C].

Wal-Mart Stores Inc , the world's largest retailer, offered to buy Massmart, South Africa's third-largest retailer by value, for more than $4 billion as it seeks to expand on the continent. Wal-Mart, a Dow component, slipped 0.6 percent to $53.74. [ID:nLDE68Q05T]

AirTran Holdings Inc jumped 61.1 percent to $7.33 after Southwest Airlines Co offered to buy the regional carrier for $7.69 per share. Southwest shot up 14.4 percent to $14.05, while the Arca airline index <.XAL> rose 3.2 percent. [ID:nSGE68Q0GW]

"We are starting to see firms actually putting their money to use instead of just being on the sidelines," Massocca said.

The Dow Jones industrial average <.DJI> was up 4.01 points, or 0.04 percent, at 10,864.27. The Standard & Poor's 500 Index <.SPX> was down 0.09 points, or 0.01 percent, at 1,148.58. The Nasdaq Composite Index <.IXIC> was up 2.49 points, or 0.10 percent, at 2,383.71.

The S&P 500 is up 9.6 percent from a month ago as investors welcomed recent data that suggested the economy would avoid a double-dip recession. The benchmark has posted monthly gains of more than 9 percent only twice since the start of 1992.

But options investors seemed to be more concerned about current market conditions.

Larry McMillan, president of McMillan Analysis Corp, said the most extreme overbought conditions were seen in the term structure of VIX futures. The CBOE Volatility Index <.VIX> is the most popular gauge on Wall Street to measure investor anxiety.

"There are very large premiums on the VIX futures, and their prices are aligned such that there is a steep upward slope from one month to the next. That is, the "term structure" is very steep," he said on a website.

"While that reflects an ongoing bullish market, it is also an overbought condition. The last three times that the term structure approached levels this steep, sharp market corrections followed with the S&P dropping from 50 to 200 points."

The VIX was up 2.6 percent at $22.27.

He added that if the VIX falls below 21, along with S&P breaking above 1,130, it would be a positive confirmation. However, if VIX doesn't follow through, it would be another warning indicator.

The VIX index usually has an inverse relationship with the Standard & Poor's 500 benchmark as it tracks option prices that investors are willing to pay as a protection on the underlying stocks. (Reporting by Angela Moon, Editing by Kenneth Barry)