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US STOCKS-Banks, megacaps drive Wall Street indexes as Fed decision looms

(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window)

* Estee Lauder sinks after China curbs dent outlook

* Western Digital jumps after call to break up business units

* Indexes: Dow up 0.41%, S&P 500 up 0.76%, Nasdaq up 0.61% (Adds analyst comment, market details, updates prices)

By Devik Jain and Echo Wang

May 3 (Reuters) - Wall Street's main indexes rose on Tuesday, as investors picked up shares of financials and beaten-down megacap companies, while staying cautious about the Federal Reserve's ability to tame inflation without impeding growth.

Nine of the 11 major S&P 500 sectors rose, with energy and financials up 2.7% and 1.7%, respectively. The S&P 500 banks index gained 2.5%, with Citigroup Inc climbing 3.8%.

The U.S. central bank kicked off its two-day policy meeting on Tuesday. Traders see a 99.9% chance of a 50 basis-point hike on Wednesday, according to CME's FedWatch Tool, which would mark the largest rate hike by the Fed since May 2000.

The spotlight stays on Fed Chair Jerome Powell's news conference on Wednesday for comments on the future path of interest rates and balance-sheet reduction.

“The two main drivers of what's going on in markets is the Federal Reserve meeting coming up on Wednesday, and some questions about what are the odds of a potential recession in 2022 or 2023,” said Tom Hainlin, global investment strategist at U.S. Bank Wealth Management.

In April, Wall Street was hammered by uncertainty around the Fed's ability to engineer a soft landing for the economy, mixed earnings from some big growth companies, the war in Ukraine and pandemic-related lockdowns in China.

The Nasdaq Composite slumped nearly 13.3% last month, its worst monthly performance since October 2008 as richly valued high-growth stocks came under pressure from rising rates.

At 1:59 p.m. EDT, the Dow Jones Industrial Average was up 136.06 points, or 0.41%, at 33,197.56, the S&P 500 gained 31.54 points, or 0.76%, to 4,186.92 and the Nasdaq Composite added 76.83 points, or 0.61%, to 12,612.85.

The indexes were boosted by Apple Inc, Tesla Inc and Exxon Mobil Corp which rose between 0.6% and 2%.

Estee Lauder Cos Inc slumped 4.5% after the cosmetics maker cut its full-year profit forecast due to fresh COVID-19 restrictions in China and the Russia-Ukraine crisis.

Hilton Worldwide Holdings Inc slid 2.9% after the hotel operator forecast a bleak full-year profit.

Western Digital Corp jumped 15.5% as the largest percentage gainer on the S&P 500 after activist investor Elliott Investment Management urged the company to separate its Flash business and offered to invest $1 billion to facilitate a sale or a spin-off of the business.

Advancing issues outnumbered declining ones on the NYSE by a 2.42-to-1 ratio; on Nasdaq, a 1.59-to-1 ratio favored advancers.

The S&P 500 posted 2 new 52-week highs and 32 new lows; the Nasdaq Composite recorded 22 new highs and 160 new lows. (Reporting by Echo Wang in New York and Devik Jain in Bengaluru Editing by Anil D'Silva and Matthew Lewis)