NEW YORK (Reuters) - The stock market will likely start the week on a hesitant note with Wall Street facing the first Federal Reserve interest-rate decision in many months not knowing that a cut is virtually guaranteed.

Sparks may fly, however, after Yahoo Inc allowed a deadline for Microsoft Corp's takeover offer to pass over the weekend without agreeing to a deal. The world's largest software company set a Saturday deadline for the two sides to reach a deal and said it would consider its options of going hostile or withdrawing its offer.

A disappointing earnings report from Microsoft capped gains by all three major US stock indexes this week.

For the week, the Dow Jones industrial average ended up 0.3 percent, the Standard & Poor's 500 Index gained 0.5 percent and the Nasdaq Composite Index rose 0.8 percent.

Despite Microsoft's miss, the past two weeks have seen a steady stream of encouraging earnings reports. This was especially true in the financial sector, which gave hope to Wall Street that the worst of the credit crisis is near and suggested that further rate cuts may not be needed.

Expectations for a half-point cut were erased on April 18, when stocks staged a sharp rally after strong earnings from Google and Caterpillar pointed to resilience in the face of a slowdown.

While the majority of bets are for a 25 basis-point cut, there's still a one-in-four chance of no rate cut, based on fed funds futures. Not since August has there been any question whether or not the Fed would cut rates.

The Fed will announce its rate decision on Wednesday at 3.15 p.m. Bermuda time. Earlier that day, the Commerce Department releases first-quarter gross domestic product data.

"If the GDP comes in well above consensus expectations and the Fed stays on hold, then the market reaction will probably be positive because it shows maybe the crisis is over and the economy is not heading into recession," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, in Newark, New Jersey.

Economists forecast that GDP grew at an annual rate of 0.2 percent in the first three months of the year, suggesting that the economy is not quite into recession territory.

If "the GDP number is zero or negative and the Fed remains on hold, the reaction will be negative," Praveen said. "But I don't think the Fed will want to disappoint the market, so they will probably cut by 25 basis points."

After the dust settles from the Fed's decision, the market may come to a lull in anticipation of the monthly payrolls report, due for release at 9.30 a.m. (Bermuda time) on Friday.

After a string of positive earnings reports and some market-boosting data, the April jobs report may cast some gloom over Wall Street. The forecast: US non-farm payrolls cut 80,000 jobs last month, according to economists polled by Reuters.

"Jobs data is very US-centric," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois. "That may stand in contrast to what we've seen this week from the various earnings reports. The earnings reports are colored from the perspective as to how much of their earnings come from overseas."

Foreign revenues have been the saviour of this quarter's earnings results. With the dollar at a record low against the euro, US companies have been able to sell more to overseas customers and have enjoyed a positive currency translation when they put those revenues on their balance sheets.

Among the companies set to report earnings next week, overseas sales will be key for major multinationals such as Avon Products Inc, Procter & Gamble Co and Clorox Co.

Also set to report quarterly profits next week are cereal maker Kellogg Co and Kraft Foods Inc whose results may show how consumers are coping with higher food prices and whether they are turning away from brand names in favor of cheaper private store labels.

Inflation will likely be a hot topic on Wall Street as rice shortages stir protests worldwide and as crude oil flirts with $120 a barrel as the summer driving season approaches.

Minutes from the Federal Reserve's last meeting showed policy-makers are concerned about signs of price pressures coinciding with a weakening growth outlook.

"Maybe we've finally crossed over the line where inflation is such a problem globally, where the Fed is going to be forced to stop" cutting rates, said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.