US STOCKS-Wall St slips as gov't shutdown more likely on budget impasse
* Possibility of budget deal before midnight seen as remote
* Major stock indexes still on track to end September with monthly gains
* Energy, defense stocks fall
* Indexes down: Dow off 0.6 pct; S&P off 0.4 pct; Nasdaq off 0.2 pct
NEW YORK, Sept 30 (Reuters) - U.S. stocks slipped on Monday as the possibility of a partial government shutdown rose, although major indexes were on still track to close out September with solid monthly gains.
With just hours to go before a midnight deadline to avert a federal government shutdown, the S&P 500 was down about 0.5 percent, cutting 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.
"I don't think there is 'panic' per se, although the VIX (CBOE Volatility index) is near 17 which is higher than what we've been seeing for some time," said Randy Frederick, director of trading and derivatives at Charles Schwab & Co in Austin, Texas.
"Some may think it's safe to move to cash and weigh out the possibilities."
The CBOE Volatility index, often used to measure investor anxiety, was up 6.8 percent at 16.51. The index has risen more than 19 percent in the last three sessions.
Senate Democrats on Monday killed a proposal by the Republican-led House of Representatives to delay Obamacare for a year in return for temporary funding of the federal government.
The Dow Jones industrial average was down 98.09 points, or 0.64 percent, at 15,160.15. The Standard & Poor's 500 Index was down 7.41 points, or 0.44 percent, at 1,684.34. The Nasdaq Composite Index was down 6.53 points, or 0.17 percent, at 3,775.06.
Energy shares slumped 0.7 percent, dropping alongside a 1 percent fall in U.S. crude oil prices as the possible government shutdown stoked demand concerns. Exxon Mobil fell 0.6 percent to $86.42 while Occidental Petroleum lost 1.1 percent to $93.39.
Defense names also declined, as a government shutdown would most likely diminish the amount of new contracts being granted. Lockheed Martin Corp fell 0.9 percent to $128.08 and Alliant Techsystems Inc lost 0.5 percent to $97.79. The PHLX defense sector lost 0.6 percent.
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 harm 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 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 pullback in equities as a buying opportunity, based on historical performance after prior shutdowns and the low risk of a steep decline.
Historically, Wall Street has managed to avoid steep downside during similar incidents. During the federal government shutdown from Dec. 15, 1995, to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov. 13 to Nov. 19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.
"We can't rely on history because (shutdowns) happen so infrequently that historical data may not be useful," Frederick said.
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."
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 2.3 percent, the S&P is up 3.1 percent and the Nasdaq is up 5.1 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.