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* Energy shares drop as oil prices slide
* Saudi to recover oil supplies sooner than expected - sources
* Home Depot drops after Guggenheim downgrade
* Corning cuts forecast for display volumes, shares fall
* Dow down 0.19%, S&P off 0.07%, Nasdaq flat (Updates to early afternoon)
By Medha Singh
Sept 17 (Reuters) - U.S. stocks were modestly lower on Tuesday as investors moved to the sidelines ahead of the Federal Reserve's two-day policy meeting, while the impact of weekend attacks on Saudi Arabia's biggest oil refinery faded.
Equity markets took a hit on Monday as the attacks wiped out nearly half of Saudi Arabia's oil production, sending oil prices soaring, while fuelling geopolitical tensions.
But President Donald Trump's statement that he does not want war and a Reuters report that Saudi Arabia was close to restoring 70% of the oil production lost calmed investor nerves.
"It looks like the market is largely overlooking the possibility of conflict at this point," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in Charlotte, North Carolina.
The energy index tracked a drop in oil prices, after recording its best one-day surge since January on Monday. The so-called defensive consumer staples, utilities and real estate posted some of the biggest gains among the 11 major S&P sectors.
The Fed concludes its policy meeting on Wednesday, where the central bank is expected to lower interest rates by a quarter percentage point, the second rate reduction of the year.
Investors will also wait for clues on how far the U.S. monetary policy easing would go, given that the central bank policymakers are deeply divided on whether more rate cuts are warranted.
"Its going to be difficult for them to signal an extremely dovish tone, given they are already half divided at this point," Zaccarelli said.
Banks, which tend to underperform in a lower interest rate environment, fell 0.95% and were the biggest drag on the S&P 500.
Latest economic reports were upbeat as U.S. manufacturing output increased more than expected in August, while homebuilders' optimism grew unexpectedly brighter in September.
At 1:06 p.m. ET, the Dow Jones Industrial Average was down 52.70 points, or 0.19%, at 27,024.12, the S&P 500 was down 2.10 points, or 0.07%, at 2,995.86. The Nasdaq Composite was up 2.24 points, or 0.03%, at 8,155.78.
Among stocks, Chipotle Mexican Grill Inc rose 2.8% as it added a new steak dish to its menu in the United States for the first time in three years.
Home Depot Inc dropped 1.4% after Guggenheim downgraded the home improvement chain's shares to "neutral" from "buy".
Corning Inc tumbled 7.4% as the Gorilla glass maker cut its current-quarter display volume forecast.
Kraft Heinz Co slipped 4% after the packaged food maker's second-largest investor, 3G Capital, sold over 25 million shares in open market at a discount.
Declining issues outnumbered advancers for a 1.05-to-1 ratio on the NYSE and a 1.30-to-1 ratio on the Nasdaq.
The S&P index recorded 15 new 52-week highs and one new low, while the Nasdaq recorded 45 new highs and 18 new lows. (Reporting by Medha Singh and Susan Mathew in Bengaluru; Editing by Anil D'Silva and Shounak Dasgupta)