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* Home Depot falls after weak 2019 forecast
* Caterpillar drops on double downgrade from UBS
* U.S. housing starts drop to more than 2-year low
* Fed chief to appear before Senate committee at 10 a.m. ET
* Indexes down: Dow 0.38 pct, S&P 0.14 pct, Nasdaq 0.17 pct (Updates to open)
By Shreyashi Sanyal
Feb 26 (Reuters) - Wall Street dropped on Tuesday, weighed down by losses in Home Depot and Caterpillar shares and ahead of Federal Reserve Chair Jerome Powell's testimony on monetary policy.
Shares of the largest U.S. home improvement retailer fell 3.2 percent, pushing the consumer discretionary sector 0.34 percent lower, after the company issued a disappointing full-year earnings forecast amid slowing momentum in the U.S. housing market.
Smaller rival Lowe's Co Inc also fell 1.4 percent.
A report from the Commerce Department further underscored weakness in homebuilding, which tumbled to a more than two-year low in December.
The PHLX housing index dipped 0.06 percent, but lower than the Monday's 0.8 percent drop.
The industrial sector dropped 0.11 percent, weighed down by Caterpillar Inc's 3.3 percent fall after brokerage UBS double downgraded the company's shares to "sell" on expectations of downward revisions to earnings.
"Caterpillar and Home Depot certainly give some concern to investors that maybe the recovery in stock prices came in too quickly," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.
"But now the markets are considerably higher than it was at the start of the year and the focus is more on whether it has risen too far too fast."
U.S. stocks have been bolstered in recent weeks by trade optimism and dovish signals from the Fed, with the benchmark S&P 500 index about 4.9 percent away from its record closing high in September.
At 9:41 a.m. ET the Dow Jones Industrial Average was down 97.94 points, or 0.38 percent, at 25,994.01, the S&P 500 was down 3.99 points, or 0.14 percent, at 2,792.12 and the Nasdaq Composite was down 12.71 points, or 0.17 percent, at 7,541.75.
The financial sector fell 0.46 percent ahead of Powell's testimony at 10 a.m. ET (1500 GMT). The central bank last month shifted to a more cautious stance on further interest rate hikes and investors will be looking for more details.
"A cautious mood develops ahead of Powell's testimony on monetary policy to the U.S. Senate Committee, as he will be drilled during the Q&A session," said Peter Cardillo, chief market economist at Spartan Capital Securities in a client note.
Healthcare stocks were flat, ahead of a U.S. Senate hearing on drug-price at 10:15 a.m. ET, where top executives from some of the largest drug companies are expected to get grilled on the high cost of prescription drugs.
Wall Street ended higher on Monday after President Donald Trump said he would delay a planned hike in tariffs on Chinese imports.
Among gainers, AutoZone Inc climbed 6.7 percent after the auto parts retailer posted better-than-expected quarterly same-store sales.
J.M. Smucker Co rose about 6.8 percent after the packaged food maker reported quarterly sales above Wall Street estimates.
Declining issues outnumbered advancers for a 1.02-to-1 ratio on the NYSE and for a 1.26-to-1 ratio on the Nasdaq.
The S&P index recorded six new 52-week highs and no new lows, while the Nasdaq recorded 11 new highs and four new lows. (Reporting by Shreyashi Sanyal and Medha Singh in Bengaluru; Editing by Anil D'Silva)