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US STOCKS-Wall St inches up on M&A deals; Iraq worries cap gains

* Medtronic to buy Covidien for $42.9 bln

* U.S. considering talks with Iran over Iraq

* Crude oil rises as Iraq violence spurs supply worry

* Dow up 0.1 pct; S&P 500 up 0.1 pct; Nasdaq up 0.2 pct

(Updates to mid-afternoon)

NEW YORK, June 16 (Reuters) - U.S. stocks edged higher on Monday afternoon, reversing a midday dip, supported by a flurry of merger news, but the advance was limited as investors kept a close watch on rising oil prices caused by turmoil in Iraq.

Seven out of the 10 S&P sector indexes rose. The S&P energy index gained 0.5 percent. The S&P financial index , down 0.4 percent, was the biggest decliner.

The United States is considering U.S. air strikes to help the Iraqi government fend off an Islamist insurgency, as well as possible discussions with neighboring Iran, U.S. Secretary of State John Kerry said on Monday. A White House official, however, said the United States is not interested in any military coordination with Tehran.

"Iraq is an excuse at this point for investors to sell at these levels. As soon as there is some selling, buyers come in almost immediately, and that is why the market is choppy like today," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "It's a further indication that this is not a market that will just plunge on geopolitical issues."

On the merger front, medical device maker Medtronic Inc agreed to buy Dublin-based Covidien Plc for $42.9 billion and shift its executive headquarters to Ireland in the latest move by U.S. companies to take advantage of lower tax rates abroad. Medtronic shares slid 1.4 percent to $59.87. In contrast, Covidien's stock jumped 20.6 percent to $86.82 and ranked as the S&P 500s biggest percentage gainer.

"The M&A absolutely keeps on coming. It's ripe for it with rates so low, all this money on the balance sheet and companies looking to grow their businesses."

The Dow Jones industrial average rose 8.58 points or 0.05 percent, to 16,784.32. The S&P 500 gained 1.50 points or 0.08 percent, to 1,937.66. The Nasdaq Composite added 7.92 points or 0.18 percent, to 4,318.57.

Williams Companies surged 18.7 percent to $56.02. The stock was the S&P 500's second-biggest percentage gainer. The pipeline operator said it agreed to acquire control of Access Midstream Partners LP for $5.99 billion as the first step toward merging it with its operations. Jefferies upgraded Williams to a "buy" rating.

Level 3 Communications said it would buy Internet services provider tw telecom Inc for $40.86 per share in a cash-and-stock deal. Level 3 shares fell 4.7 percent to $42, while tw telecom shot up 8.1 percent to $39.29.

Fusion-it Inc shares soared 23.3 percent to $11.44 after the company agreed to be acquired by SanDisk Corp for about $1.1 billion. SanDisk rose 3.4 percent to $101.75.

Crude oil futures rose in choppy trading as advances by Sunni insurgents in Iraq fueled concerns over a potential disruption to oil exports from the second-largest OPEC producer.

Brent crude for August delivery was up 39 cents at $112.85 a barrel, off an intraday high of $113.28.

The CBOE Crude Oil ETF Volatility Index, known as the Oil VIX, surged nearly 35 percent last week. The index was up 1.1 percent on Monday at 19.68, its highest since late April.

Economic data was positive. Manufacturing output rose in May and factory activity in New York state accelerated sharply this month, buoying hopes of a strong rebound in economic growth this quarter.

(Reporting by Angela Moon; Editing by Jan Paschal)