(Reuters) -- Stocks edged lower on Monday on stalled Greek debt talks, but an afternoon rally cut losses in a sign of the underlying resilience the market has shown early in the year.

Major indexes had fallen more than 1 percent as negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of debt failed to reach an agreement before the start of a summit of European leaders.

But by the afternoon those losses were cut sharply. Optimism that the U.S. markets can shrug off Europe's troubles has fueled gains in 2012, with the S&P 500 up 4.7 percent this month. Money managers, some of whom missed the upward move, appear willing to buy on intraday declines.

The action that we've seen today is very similar to what we've seen throughout most of the year so far, said Ryan Larson, head of equity trading at RBC Global Asset Management in Chicago. We see the resilience showing in U.S. markets and I think that's a theme that we've seen throughout 2012.

The U.S. appears to be slowly, slowly in the early stages of a decoupling from the euro zone, he said.

Financial shares were hurt the most by developments in Europe. The sector <.GSPF> lost 1 percent, the biggest drag on the S&P 500. Bank of America fell 3 percent to $7.06.

Material, technology and telecoms stocks led the turnaround after the close of European markets. The S&P 500 materials sector <.GSPM>, which is up over 11 percent already this year, finished barely lower on Monday.

But volume was low at just 6.2 billion shares on the NYSE, Amex, and Nasdaq. That indicated participation was light and likely amplified market movements. The 200-day moving average for volume at those venues is 7.8 billion.

Peter Lee, chief technical strategist at UBS Wealth Management, said many of his clients, who include some big institutional investors, are still cautious after the S&P 500 has climbed over 22 percent from lows in October.

Some buyers are supporting this market, and we think it may be short-covering, he said. It gives the market the illusion it is strong.

The Dow Jones industrial average <.DJI> dropped 6.74 points, or 0.05 percent, to 12,653.72. The Standard & Poor's 500 Index <.SPX> lost 3.31 points, or 0.25 percent, to 1,313.02. The Nasdaq Composite Index <.IXIC> fell 4.61 points, or 0.16 percent, to 2,811.94.

European stock markets were down over 1 percent. The FTSEurofirst 300 <.FTEU3>, a measure of Europe's biggest companies, fell 1 percent.

Even though the euro zone crisis drags on, the S&P 500 was on track for its best month since October, helped by stronger U.S. economic data and a easing of conditions in Europe's financial system following backing from global central banks.

Technical analysts will take comfort from the fact that the S&P 500 held above the psychologically important 1,300 level after crossing it for the first time in six months earlier in January. The bounce off the level on Monday was to a tee.

Germany sought to tone down reports it was pushing for Greece to give up control over its budget policy to European institutions. Greece was unlikely to accept that scenario, presenting yet another obstacle to a second bailout package for Athens.

Apple shares helped cap losses on the Nasdaq after Morgan Stanley said the iPhone maker could add China Telecom <0728.HK> and China Mobile <0941.HK> as distributors over the next year. Apple rose 1.3 percent to $453.01.

Swiss engineering group ABB agreed to buy U.S. electrical components maker Thomas & Betts Corp for $3.9 billion in cash, sending shares of the company up 23.1 percent to $71.31.

Consumer spending, the main pillar of the U.S. economy, was flat in December as households added to savings after the largest rise in income in nine months. Although the data pointed to a slow start for spending in 2012, economists were cautiously optimistic that an improving labor market will support demand.

Chris Cordaro, chief investment officer at RegentAtlantic Capital, a wealth management firm in Morristown, New Jersey, believes equities will finish sharply higher this year as Europe's problems are resolved and investors buy into stock valuations that were beaten down through much of last year.

We could definitely end the year much higher on equities, he said. We have been favoring equities in our portfolio. We have just increased our exposure to emerging markets.

(Editing by Kenneth Barry)