US STOCKS-Wall St begins new quarter higher, but shutdown a concern
* U.S. government shutdown could hurt markets if prolonged
* Wall Street had strong gains in September, third quarter
* Agreement on budget bill could help later in debt limit debate
* Ford rallies after strong September sales, GM falls
* Indexes: Dow flat, S&P up 0.3 pct, Nasdaq up 0.4 pct
NEW YORK, Oct 1 (Reuters) - U.S. stocks rose modestly on Tuesday, starting the fourth quarter on a positive note, though investors showed concerns following a partial shutdown of the U.S. government.
Congress missed a midnight deadline to agree on a spending bill, resulting in up to 1 million workers being put on unpaid leave. After missing the deadline, Republicans and Democrats continued a bitter blame game, each side shifting responsibility to the other in efforts to redirect a possible public backlash.
Shares plummeted on Monday as the deadline approached without any apparent progress in breaking the stalemate. However, some market participants viewed any pullback as a buying opportunity, and Monday's deepest losses were trimmed.
"The market has taken this into account and while the big question is how long this will last, it isn't as though we're going to fall every day the shutdown continues," said Rex Macey, chief investment officer at Wilmington Trust in Atlanta, Georgia.
While an extended shutdown could slow economic growth and damage consumer confidence, a quick resolution may have limited impact. In addition, a bipartisan solution now could ease tensions for the congressional debate over the lifting the debt ceiling in mid-October. That issue, which could result in a default on U.S. debt if not resolved, is considered more serious for markets.
"If these stalemates become less about political posturing and more about a fundamental breakdown of the government, then it becomes extremely concerning," said Macey, who helps oversee about $20 billion in assets.
The Dow Jones industrial average was up 2.25 points, or 0.01 percent, at 15,131.92. The Standard & Poor's 500 Index was up 5.20 points, or 0.31 percent, at 1,686.75. The Nasdaq Composite Index was up 15.91 points, or 0.42 percent, at 3,787.39.
While the S&P 500 traded under its 50-day moving average for much of Monday's session, it recovered some of its losses late in the day and closed above the level, suggesting some near-term support.
Equities have been strong performers recently, with major indexes climbing more than 2 percent in September. In the third quarter, the S&P rose 4.7 percent and the Nasdaq soared 10.8 percent in its biggest quarterly gain since the first quarter of 2012.
Merck & Co announced a plan to cut annual operating costs by $2.5 billion by the end of 2015 and eliminate 8,500 jobs. Shares of the Dow component rose 1.4 percent to $48.32.
Walgreen Co reported fourth-quarter earnings that exceeded expectations, helped by a rise in generic drug sales. Shares rose 2.5 percent to $55.16.
Ford Motor Co rose 1.2 percent to $17.08 after the company reported a 6 percent increase in its September sales. General Motors fell 0.6 percent to $35.74 as its sales fell 11 percent.
In the latest economic data, the Institute for Supply Management's manufacturing index came in at 56.2, up from the previous month and above expectations for a reading of 55.
The release of the government's report on construction spending in August, which had been scheduled for 10 a.m, was delayed because of the shutdown. If no deal is reached by Friday, the closely watched payroll report will also be delayed.
The report on private sector hiring in September by payrolls processor Automatic Data Processing will be released on Wednesday at 8:15 a.m. (1215).