US STOCKS-Wall St edges lower as a little progress made in Washington


* Obama shows flexibility on short-term debt limit hike

* Talisman Energy climbs on Icahn stake

* PHH exploring unit split - sources

* J.C. Penney jumps on turnaround update

* Indexes off: Dow 0.27 pct, S&P 0.22 pct, Nasdaq 0.19 pct

By Chuck Mikolajczak

NEW YORK, Oct 8 (Reuters) - U.S. stocks dipped slightly onTuesday despite signs of slight progress to resolve the fiscalstandoff in Washington, although no agreement appeared to belikely soon.

With the partial U.S. government shutdown in its second weekand only nine days left for Congress to raise the U.S. debtceiling, President Barack Obama said he would accept ashort-term increase to avoid a default.

A Senate aide said Republican Senator Rob Portman, who is influential on budget matters, floated a plan to cut federalspending and reform the U.S. tax code as part of a broader dealto reopen shuttered government agencies and raise the debtceiling.

"In this type of environment, pre-earnings season where itis headline driven by a market bludgeoned with continued soundbites about the shutdown, it's not a surprise to see marketsmake these smaller moves," said Sal Arnuk, co-manager of tradingat Themis Trading in Chatham, New Jersey.

"What is really at stake is a tug-of-war going on becauseinvestors don't know if they want to avoid getting caught up ina crisis-driven selloff versus missing a resolution rally."

The shutdown has led to few economic data releases, leavinginvestors to focus on the earnings-reporting season. However,earnings are more likely to affect individual companies thandrive marketwide moves.

After Tuesday's market close, former Dow component Alcoa Inc will report earnings as will KFC parent company Yum!Brands Inc.

The longer the government shutdown continues, the greaterthe damage to the economy, according to analysts, increasing theprobability the Federal Reserve will leave its stimulus measuresin place.

The Dow Jones industrial average fell 39.96 points or0.27 percent, to 14,896.28, the S&P 500 lost 3.68 pointsor 0.22 percent, to 1,672.44 and the Nasdaq Composite dropped 7.077 points or 0.19 percent, to 3,763.3.

McKesson shares rose 5.7 percent to $136.99 as thebest performer on the S&P 500 after Dow Jones Newswires reportedthe company was in advanced talks to take over Celesio in a possible 3.74 billion euro ($5.08 billion) deal.

PHH Corp is exploring splitting up its mortgage andauto fleet leasing businesses and selling each of the units,three people familiar with the situation told Reuters on Monday.Its shares fell 2.5 percent to $25.26.

J.C. Penney Co Inc rose 2.5 percent to $7.90 afterthe struggling retailer reported a smaller decline in same-storesales for September compared with August and said it was seeingpositive signs in many areas of its business.

U.S.-listed shares of Talisman Energy Inc advanced 2percent to $13 after activist investor Carl Icahn said he hadpurchased about 61 million shares of the underperformingCanadian oil producer and may seek a seat on the company'sboard.

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