UPDATE 6-Oil falls on worry over looming U.S.government shutdown
* U.S. government faces shutdown on funding impasse
* Market reacts after Obama, Iran's Rouhani talk on phone
* Italian government turmoil piles on uncertainty
(Updates prices, changes byline, dateline, pvs LONDON)
NEW YORK, Sept 30 (Reuters) - Brent crude oil fell on Monday, heading for its first monthly decline since May, as a looming U.S. government shutdown clouded the outlook for demand while tensions over Iran continued to ease.
A last-minute deal between Republicans and Democrats to resolve a budget impasse in Washington appeared less likely, increasing the chances of the U.S. government shutting down at midnight.
U.S. equities and the U.S. dollar also fell, with energy shares posting the steepest losses of the 10 S&P 500 sectors.
"There's a risk-off environment developing with the imminent government shutdown, which is clearly a negative for just about everything, including economic activity," said John Kilduff, partner at Again Capital LLC in New York.
Brent lost 44 cents to $108.19 a barrel by 11:19 a.m. EDT (1519 GMT), set for a monthly drop of more than 5 percent. Brent hit an earlier low of $107.22.
U.S. crude lost $1.07 to $101.80 a barrel, paring losses from a session low of $101.05.
Front-month U.S. RBOB gasoline futures, which expire Monday, led the complex down. The contract for October delivery fell 3.6 cents per gallon to $2.64, while the November contract slipped 3.2 cents to $2.63.
"This is a slack demand period and inventories are pretty good. RBOB seems to be incredibly out of favor at the moment, with refineries still running at a relatively high rate," said Kilduff.
U.S. stocks opened lower as investors shifted toward safe havens such as the Japanese yen and Swiss franc. Stocks had pared some of their losses by 11 a.m. EDT 1/81500 GMT 3/8.
Concerns that Italy might plunge once again into political turmoil eased after a group of senators from the center-right party of Silvio Berlusconi threatened to form a breakaway group unless the former premier backs down on his hard line to bring down the government.
"Given the political uncertainty prevailing in the U.S. and Italy and the evident rapprochement between the U.S. and Iran, there is a threat of oil retreating further over the next few days towards $105 a barrel (Brent) and $100 a barrel (WTI)," analysts at Commerzbank said.
U.S. President Barack Obama and new Iranian President Hassan Rouhani spoke by telephone on Friday, the highest-level contact between the two countries in three decades, as the two sides seek a deal over Iran's nuclear program.
"The phone call between Obama and Rouhani was a bit late on Friday, so that needs to be priced in, but is the continuation of the improving sentiment over Iran," Olivier Jakob, an analyst at Petromatrix, said.
Exports from Iran have more than halved in recent years to around 1 million barrels per day in 2012 due to tightening sanctions.
Iran's top four crude buyers - China, India, Japan and South Korea - cut their purchases by 16 percent in the first eight months of 2013.
World powers are due to hold a new round of talks over Iran's nuclear program in mid-October in Geneva.
Supply concerns have also eased in recent weeks as exports from Libya have recovered to above 580,000 barrels per day, following weeks of disruption.
Investors cut their net long positions in Brent for a fourth week in a row to 167,745 contracts, the InterContinental Exchange (ICE) said.
(Additional reporting by Ron Bousso in London, Florence Tan in Singapore; Editing by Jane Baird, Keiron Henderson and John Wallace)