Wall Street down as gov't shutdown draws closer

By Chuck Mikolajczak

NEW YORK (Reuters) - U.S. stocks fell on Monday as the possibility of a last-minute deal to resolve a budget impasse in Washington appeared remote, pushing the government closer to a partial shutdown.

Losses were broad, with each of the ten major S&P 500 sectors lower on the day, led by energy and financials shares.

But the S&P 500 index managed to cut its initial losses almost in half. Market participants have grown accustomed to political battles in Washington resulting in a last-minute accord and voiced skepticism any shutdown would last for an extended period.

"People are getting immune to the fact that the government might or might not shut down. It spooked people in the past, but now we're seeing a mild reaction to a potential shutdown," said Joseph Benanti, managing director at Rosenblatt Securities in New York.

"We don't expect it to be long term."

The House of Representatives early on Sunday voted for an emergency spending bill that includes a one-year delay of President Barack Obama's signature healthcare overhaul despite threats of a veto from the White House.

The Democratic-controlled Senate reconvenes at 2 p.m. (1800 GMT) and was poised to reject a funding measure that includes the delay.

A shutdown would have wide-ranging implications for most types of assets. If a deal were reached quickly, markets might recover, but a prolonged shutdown could do significant harm to the economy and consumer confidence. While a deal could still be reached before the government's fiscal year ends at midnight on Monday, such a possibility was considered unlikely.

Up to 1 million government employees could be furloughed without a deal and, if the shutdown takes place, the Labor Department will postpone issuing its closely-watched monthly employment report scheduled for Friday.

Some market participants viewed any possible pullback in equities as a buying opportunity, based on historical performance after prior shutdowns and the low risk of a steep decline.

In a note to clients, Bank of America Merrill Lynch analyst Savita Subramanian said the risk of a correction of more than 10 percent from the political wrangling is a "low probability event" and "given that valuation, sentiment and fundamentals remain supportive, we would view such an event as a buying opportunity."

Energy shares <.SPNY> slumped 0.9 percent, dropping alongside a 1 percent fall in U.S. crude oil prices as the possible government shutdown stoked demand concerns. Exxon Mobil fell 0.9 percent to $86.13 while Occidental Petroleum lost 1.5 percent to $93.04.

Defense names also declined, as a government shutdown would most likely diminish the amount of new contracts being granted. Lockheed Martin Corp fell 1.2 percent to $127.63 and Alliant Techsystems Inc lost 1 percent to $97.20. The PHLX defense sector <.DFX> lost 0.8 percent.

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The Dow Jones industrial average fell 104.52 points or 0.68 percent, to 15,153.72, the S&P 500 lost 8.2 points or 0.48 percent, to 1,683.55 and the Nasdaq Composite dropped 7.81 points or 0.21 percent, to 3,773.79.

Reflecting the uncertainty in Washington, the CBOE Volatility index <.VIX> gained 7.8 percent. The index has risen more than 19 percent in the last three sessions.

The S&P managed to find support at its 50-day moving average of 1,679.96, breaking below that level then quickly rebounding. The index is on track for its seventh decline in the last eight sessions, in which it has dropped 2.5 percent.

For September, the Dow is up 2.2 percent, the S&P is up 3 percent and the Nasdaq is up 5 percent.

In economic data on Monday, the Chicago Purchasing Managers index rose more than expected in September, climbing to 55.7 from 53 in the previous month. Analysts were expecting a reading of 54. The positive data had little lasting impact on the market's gloomy tone.

(Additional reporting by Julia Edwards; Editing by Nick Zieminski)