* Debt ceiling debate, earnings season worries knock futures
* Retail sales rise in Dec, NY manufacturing contracts in Jan
* Futures down: S&P 4.5 pts, Dow 35 pts, Nasdaq 8.25 pts
By Leah Schnurr
NEW YORK, Jan 15 (Reuters) -
Wall Street was set to open lower on Tuesday as investors fretted over the debate brewing in Washington over raising the U.S. borrowing limit as well as what is expected to be a lackluster earnings season.
Futures trimmed losses shortly after a batch of data that showed retail sales rose more than expected in December, but manufacturing activity in New York state contracted for the sixth month in a row in January.
On Monday, President Barack Obama rejected any negotiations with Republicans over raising the U.S. debt ceiling. The United States could default on its debt if Congress does not increase the borrowing limit.
Resolving the debt ceiling debate is more a question of how than if. Investors are wary of another last-minute agreement like the one in August 2011, said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
"Of course people expect the government will not default on its debt ... but there could be damage done in how it's resolved," said Meckler. "A long, dragged out fight over this damages the credibility of the government and can weaken the global market for U.S. debt."
Speaking separately on Monday, Federal Reserve Chairman Ben Bernanke urged lawmakers to raise the debt ceiling. The central bank chairman also gave a cautiously optimistic outlook for U.S. growth but no clear hints on when the Fed would curb its aggressive bond purchases.
Corporate earnings season picks up the pace this week and investors are bracing for disappointment. Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.9 percent from a year ago, Thomson Reuters data showed.
S&P 500 futures fell 6.2 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 down 35 points, and Nasdaq 100 futures lost 6.75 points.
Rounding out the economic data released before the opening bell, producer prices fell last month as food prices declined. A report on business inventories is on tap for 10:00 a.m. ET (1500 GMT).
Although the data, on balance, was positive, reaction in the market was likely to be limited with investors' attention on the negotiations over the debt ceiling and spending cuts, said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, NY.
"'Fiscal Cliff Two' is now the principle focus of investors," he said.
Homebuilder Lennar on Tuesday reported profit that beat expectations amid a jump in new home orders. The stock lost 0.9 percent to $40.65 in premarket trading.
Forest Laboratories reported a third-quarter loss, sending its shares down 5.3 percent at $35.60.
Shares of Dell rose 4.5 percent to $12.83 in premarket trade the day after sources said the company is in talks with private equity firms on a potential buyout.
Facebook added 0.7 percent to $31.15 ahead of a major news event at its headquarters. The secretive nature of the event has triggered a guessing game about what the company could unveil.