WRAPUP 1-Economic fears grow as U.S. government shutdown drags on
* Republicans determined to block Obama healthcare reforms
* Fears grow shutdown will last until mid-October
* Treasury warns of potential "catastrophic" downturn
Oct 3 (Reuters) - A U.S. government shutdown entered its third day on Thursday with little sign of compromise between Republicans and Democrats and concerns grew about the economic consequences of a prolonged stalemate.
The standoff, prompted by Republicans' determination to halt President Barack Obama's healthcare reforms, appeared to be merging with a more complex fight looming later this month over raising the federal debt limit. Some feared this could stymie any attempts to end the shutdown before the middle of October.
In a report on Thursday detailing the potential economic impact of a default, the Treasury warned that failing to pay the nation's bills could punish American families and businesses with a worse recession than the 2007-2009 downturn.
"A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket," the Treasury Department said.
"The negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," it said.
The shutdown was beginning to hit the factory floor, with major manufacturers like Boeing Co and United Technologies Corp warning of delays and employee furloughs in the thousands if the budget impasse persists.
Companies that rely on federal workers to inspect and approve their products or on government money to fund their operations said they were preparing to slow or stop work if the first government shutdown in 17 years continues into next week.
REFUSAL TO NEGOTIATE
Republicans have tried to tie continued government funding to measures that would undercut Obama's signature healthcare law. Obama and his Democrats have refused to negotiate on a temporary funding bill, arguing it is the duty of Congress to pay for programs it already authorized.
The shutdown took effect at midnight on Monday (0400 GMT on Tuesday), leaving nearly a million federal workers sidelined without pay and many others in the private sector suffering from the knock-on effect.
If the funding issue does merge with the debt ceiling debate, the result could be a dangerous and unpredictable fiscal superstorm. It may be harder to resolve than the shutdown alone or the 2011 debt limit struggle that sent financial markets plummeting and brought the United States to the brink of default.
Republican Representative Steve King of Iowa, speaking on CNN's "New Day" program, said Republicans were looking for solutions but Democrats were refusing to negotiate. But he gave no sign of a softening in the hardline stand on healthcare reforms, which passed into law in 2010 and are in the process of being implemented.
"If there is a bump in the economic road, if there is a political penalty to be paid, we can recover from those things," he said. "But we can never recover if Obamacare is implemented on the American people, and it will diminish the trajectory of the American destiny by turning us into a dependency society."
Obama summoned congressional leaders from both parties to the White House on Wednesday evening but failed to bridge the gap, with both sides reiterating their positions and accusing each other of intransigence.
Despite the shutdown, Republicans have failed to derail Obama's controversial healthcare law, which passed a milestone on Tuesday when it began signing up uninsured Americans for subsidized health coverage.
The government on Wednesday scrambled to add computer capacity to handle an unexpectedly large number of Americans logging onto new online insurance marketplaces.
Senate Republican leader Mitch McConnell, speaking to CNBC, described the law as a "trainwreck" that was "creating havoc across the country," and reiterated Republicans' call for a one-year delay in its implementation.
QUESTIONS ABOUT REPUBLICAN STRATEGY
Though some moderate Republicans have begun to question their party's strategy, House Speaker John Boehner so far has kept them largely united behind a plan to offer a series of small bills that would re-open select parts of the government most visibly affected by the shutdown.
The Tea Party Express, one of the anti-tax groups in the conservative Tea Party that has led the fight against Obamacare, sent an email to supporters on Wednesday evening saying that as many as 12 Republicans had indicated they were willing to "give up on the fight" and join Democrats in voting for a funding bill without conditions.
"We need your immediate support to put pressure on the weak Republicans to pass a sensible solution that allows America to avoid the Obamacare train-wreck, while fully funding the federal government," the group said in its email to supporters.
Prompted by anger of the shutdown of popular government programs such as cancer research and national parks, Republicans have presented a string of measures to fund small parts of government, a tactic Democrats have rejected, insisting on a comprehensive spending bill to fund all government operations.
The Republican-controlled House passed and sent to the Senate on Wednesday a funding bill that would re-open the National Institutes of Health, which conducts medical research, and another bill to reopen shuttered federal parks and museums, such as the Smithsonian museums, the National Gallery of Art and the Holocaust Memorial Museum in Washington.
Both bills passed with the support of about two-dozen Democrats, who joined Republicans. The House was expected to vote Thursday on measures to fund veterans' care and the Army Reserve.
But the measures are likely to be defeated in the Democratic-controlled Senate, and Obama said he would veto them if they reached his desk.
BIG COMPANIES WORRIED
There was increasing concern among major U.S. companies.
United Technologies Corp said nearly 2,000 workers in its Sikorsky Aircraft division, which makes the Black Hawk military helicopter, would be placed on furlough Monday if the shutdown continued.
That number would climb to more than 5,000 and include employees at its Pratt & Whitney engine unit and Aerospace Systems unit if the shutdown continues into November, the company said in a statement.
Aircraft maker Boeing said it is taking steps to deal with possible delays in jetliner deliveries, including its new 787 Dreamliner, because thousands of U.S. aviation officials needed to certify the planes have been idled.