* Home Depot, Target profits top Wall St forecasts
* U.S. housing starts lower-than-expected in July
* Indexes up: Dow 0.7 pct, S&P 500 0.6 pct, Nasdaq 0.7 pct
(Updates to mid-morning)
By Edward Krudy
NEW YORK, Aug 18 (Reuters) - U.S. stocks rose on Tuesday after better-than-expected results from retailers Home Depot Inc and Target Corp offset a surprise drop in housing starts.
The rebound followed a sharp decline in global equity markets the previous day when the S&P 500 index fell more than 2 percent.
U.S. housing starts and permits unexpectedly fell in July, pulled down by steeper declines in multifamily units, a government report showed, adding to concerns that the nascent housing market recovery may be slow.
But better-than-expected quarterly results for the two large retailers helped boost stock indexes, in the latest indication that U.S. corporations are weathering the economic downturn.
Home Depot, the largest U.S. home improvement chain, beat estimates and raised its outlook, while profit at Target, the No. 2 U.S. retailer, came in better than Wall Street's consensus forecast. A disappointing outlook from home improvement retailer Lowe's Cos Inc helped push equities to their worst loss in seven weeks on Monday.
Home Depot shares rose 3.1 percent to $26.93 while Target climbed 5.7 percent to $43.56. The S&P retail index rose 1.1 percent.
"We are seeing some tentative signs of improvement in the market this morning, following yesterday's losses around the world," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
But he added: "Today's housing start data does reinforce the fact that any housing recovery that does take place is likely to be limited in scope, at least over the near term."
The Dow Jones industrial average was up 63.63 points, or 0.70 percent, at 9,198.97. The Standard & Poor's 500 Index was up 6.50 points, or 0.66 percent, at 986.23. The Nasdaq Composite Index was up 13.03 points, or 0.67 percent, at 1,943.87.
Smartphone makers Apple Inc, Research in Motion Ltd and Palm Inc, helped lift the Nasdaq after RBC raised its price target on the shares, citing compelling investment opportunities in the smartphone market.
After the market closes, Hewlett-Packard Co will report quarterly earnings that could jolt technology portfolios if there are signs of improved enterprise demand.
The broad S&P 500 index has rallied nearly 50 percent since early March. The size of move has led many investors to expect a significant pullback heading out of the summer months.