* CPI tops expectations, points to firming inflation
* Housing starts fall more than anticipated
* Fed begins two-day policy meeting
* Indexes up: Dow 0.04 pct, S&P 0.05 pct, Nasdaq 0.35 pct (Updates to market open)
By Chuck Mikolajczak
NEW YORK, June 17 (Reuters) - U.S. stocks bounced back from earlier declines Tuesday to gain modestly as investors shrugged off weaker-than-expected housing data and the latest flaring of tensions in Iraq, and as the Federal Reserve began a two-day policy meeting.
Housing starts and building permits fell more than expected in May, as groundbreaking for homes dropped 6.5 percent to a seasonally adjusted annual pace of 1 million units.
But the Consumer Price Index increased 0.4 percent last month, pointing to a steady firming of inflation pressures which should ease concerns of some Fed officials that inflation was running too low.
The CPI data boosted yields on the 10-year Treasury notes as high as 2.65 percent, which helped lift financial stocks 0.6 percent as the best performing S&P sector.
Iraq's Shi'ite rulers defied Western calls to reach out to Sunnis to defuse an uprising in the north of the country, declaring a boycott of Iraq's main Sunni political bloc and accusing Sunni power Saudi Arabia of promoting "genocide."
"They are digesting pretty much everything that is coming, it doesn't matter whether it is an insurgency in Iraq or any of the things we've seen," said Gordon Charlop, a managing director at Rosenblatt Securities in New York.
"Every time there is a selloff buyers materialize, sellers are reluctant to lean too heavily into it - there are still no better venues."
The Fed commenced its two-day policy meeting at 10:00 a.m. EDT (1400 GMT) as scheduled, and is widely expected to conclude with another $10 billion scale-back of its monthly bond purchases. Not much else is expected in the way of concrete policy moves, putting the focus on whether officials will tip their hand on longer-term plans for interest rates.
The Dow Jones industrial average rose 6.42 points, or 0.04 percent, to 16,787.43, the S&P 500 gained 1.03 points, or 0.05 percent, to 1,938.81 and the Nasdaq Composite added 15.10 points, or 0.35 percent, to 4,336.21.
Yingli Green Energy shares surged 8.2 percent to $3.81 after nearly halving its quarterly net loss, with margins boosted by a small rise in panel prices and cost controls.
U.S.-listed shares of GW Pharmaceuticals jumped 14.9 percent to $88.74 after the company said its experimental cannabis product Epidiolex showed promising results in children and young adults with treatment-resistant epilepsy. (Editing by Bernadette Baum)