* Bin Laden's death only temporarily eases tensions
* CBOE Volatility index up more than 5 pct
* Teva to buy Cephalon, Arch to acquire Int'l Coal
* Stocks: Dow flat, S&P down 0.1 pct, Nasdaq down 0.3 pct (Updates to midday; changes byline)
By Angela Moon
NEW YORK, May 2 (Reuters) - U.S. stocks erased gains and were little changed on Monday as the killing of al Qaeda leader Osama bin Laden was seen as only temporarily easing geopolitical tensions.
The CBOE Volatility Index, Wall Street's so-called fear gauge, rose more than 5 percent and U.S. crude prices sharply pared losses.
The market opened higher after news of bin Laden's death by U.S. forces. For details, see.
"Initial market reaction to the news was positive... Gains were trimmed, however, as market participants began to focus upon the prospects for a potential surge in terror attacks against Western targets in retaliation for the killing," said Mike Ryan, chief investment strategist at UBS in New York.
Stocks also were boosted by merger and acquisition announcements.
Israel-based Teva Pharmaceuticals Industries Ltd will buy Cephalon Inc for $6.8 billion, and Arch Coal Inc will acquire International Coal Group Inc for $3.4 billion. and
In addition, Community Health Systems Inc raised its bid for Tenet Healthcare Corp by $1.75 per share to $7.25.
The Dow Jones industrial average was up 0.42 point at 12,810.96. The Standard & Poor's 500 Index was down 1.53 points, or 0.11 percent, at 1,362.08. The Nasdaq Composite Index was down 9.19 points, or 0.32 percent, at 2,864.35.
Byron Callan of Capital Alpha Partners said Bin Laden's death could accelerate U.S. moves to withdraw from Afghanistan, but significant concerns about the reaction of Pakistan and al Qaeda operatives around the world remained.
"We still don't know what could come next," Callan said. "We've checked the 'Bin Laden' box, but we still have some open issues regarding Pakistan and what else al Qaeda could do."
The VIX jumped 5.4 percent to 15.54. The index, which often moves inversely to the S&P 500, measures the cost of hedges or protection investors are willing to pay against a fall in the S&P 500.
Markets have been buffeted in recent months as unrest in the oil-producing Middle East region sparked concerns about the risk to supplies and the global economy.
U.S.-listed shares of Teva rose 3.2 percent to $47.18, while Cephalon gained 4.7 percent to $80.65.
Arch shares were flat at $34.40, but International Coal soared 30.8 percent to $14.43 and was the most actively traded stock on the New York Stock Exchange.
Community Health fell 0.8 percent to $30.49, and Tenet dropped 4 percent to $6.65.
In economic news, construction spending rebounded in March, while the pace of U.S. manufacturing growth slowed in April for a second straight month.
In earnings news, Humana Inc's quarterly profit rose 22 percent and the health insurer forecast second-quarter earnings above expectations. The stock rose 0.4 percent to $76.43. (Additional reporting by Andrea Shalal-Esa, Editin