* U.S. considering talks with Iran over Iraq
* Medtronic to buy Covidien for $42.9 bln
* New York factory growth climbs in June
* Indexes off: Dow 0.16 pct, S&P 0.11 pct, Nasdaq 0.16 pct (Updates to late morning)
By Chuck Mikolajczak
NEW YORK, June 16 (Reuters) - U.S. stocks were little changed on Monday, as caution caused by turmoil in Iraq was countered by a flurry of merger activity.
The United States is considering U.S. air strikes to help the Iraqi government fend off an Islamist insurgency, as well as possible discussions with neighboring Iran, U.S. Secretary of State John Kerry said on Monday.
"If the market really didn't back off because of (Iraq), people are concerned, they will keep watching it and unless it really implodes the market is just going to churn," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York.
Merger activity continued to support the market and keep declines in check. Medical device maker Medtronic Inc agreed to buy Dublin-based Covidien Plc for $42.9 billion and shift its executive headquarters to Ireland in the latest move by U.S. firms to harvest lower tax rates abroad. Medtronic shares shed 0.4 percent to $60.48 while Covidien jumped 21.6 percent to $87.58.
"The M&A absolutely keeps on coming. It's ripe for it with rates so low, all this money on the balance sheet and companies looking to grow their businesses," said Polcari.
Economic data was positive, as manufacturing output rose in May and factory activity in New York state accelerated sharply this month, buoying hopes of a strong rebound in economic growth this quarter.
In addition, the National Association of Home Builders/Wells Fargo index of homebuilder confidence rose four points to 49 in June, just a point below the level that indicates favorable conditions.
The Dow Jones industrial average fell 27 points or 0.16 percent, to 16,748.74, the S&P 500 lost 2.05 points or 0.11 percent, to 1,934.11 and the Nasdaq Composite dropped 6.87 points or 0.16 percent, to 4,303.79.
Williams Companies climbed 24.1 percent to $58.54 as the biggest lift to the S&P. The pipeline operator said it agreed to acquire control of Access Midstream Partners LP for $5.99 billion as the first step toward merging it with its operations. Jefferies upgraded Williams to a "buy" rating.
Level 3 Communications said it would buy Internet services provider tw telecom Inc for $40.86 per share in a cash and stock deal. Level 3 shares lost 5.3 percent to $41.74 and tw telecom gained 7.2 percent to $38.95.
Fusion-it Inc surged 22.8 percent to $11.40 after agreeing to be acquired by SanDisk for $1.1 billion. SanDisk rose 2.6 percent to $101.05. (Editing by Bernadette Baum and Nick Zieminski)