By Ellis Mnyandu

The caution was tempered, however, by hopes that Congress will push to have the remaining $350 billion of the $700 billion financial rescue plan released by the time President-elect Barack Obama is sworn in on January 20.

Citigroup is among stocks to watch following news the embattled U.S. bank is nearing a deal to sell a controlling stake in its Smith Barney retail brokerage business to Morgan Stanley to raise cash.

A joint venture deal would lead to Morgan Stanley making a cash payment to Citigroup of about $2.5 billion to $3 billion, a source familiar with the situation said.

Shares of Citigroup, a Dow component, were down more than 3 percent in Europe.

Alcoa Inc is scheduled to kick off the earnings season when it posts fourth-quarter results after the bell. Its shares were down 3 percent at $10.49 before the bell.

"We are looking for a mixed to lower opening. This week, it's all about the earnings," said Peter Cardillo, chief market economist at Avalon Partners in New York.

"The market is already expecting one of the worst earnings seasons on record ... but the fact that maybe as early as this week the administration might tap the rescue money might give a little support."

S&P 500 futures shed 1.50 points, and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures were unchanged while Nasdaq 100 futures added 2 points.

Falling oil prices were likely to put energy shares in focus, with U.S. front-month crude down $1.82 at $39 a barrel.

According to Thomson Reuters estimates, fourth-quarter S&P 500 earnings should decline 15.1 percent from a year earlier.

As the economic picture worsens, Obama has vowed to restructure Washington's financial rescue plan to save more U.S. families from home foreclosures.

Obama's aides have been in discussions with the White House over whether President George W. Bush should ask Congress for permission to use the remainder of the $700 billion rescue package, aimed at stabilizing the financial system.

The request would ask to have the funds in place soon after Obama takes office on January 20. But it may prove difficult to get approval because the bailout program is unpopular with many lawmakers who feel too much of the money has already been given to Wall Street firms with few strings attached. They want some of the money to be used instead to help struggling homeowners.

Friday's government data showing that the U.S. unemployment rate surged to its highest in 16 years in December added to worries about the profit outlook as rising unemployment fuels caution among consumers, whose spending accounts for about two-thirds of U.S. economic activity.

The jobs data sent Wall Street tumbling but the benchmark S&P 500 index <.SPX> remains 18 percent higher since its November 21 bear market intraday low.

(Editing by James Dalgleish)