US STOCKS-Wall St rebounds as investors expect shutdown to be short-lived


* U.S. government shutdown could hurt markets if prolonged

* Apple shares jump on Icahn dinner with CEO Cook

* Indexes up: Dow 0.4 pct, S&P 0.7 pct, Nasdaq 0.9 pct

By Angela Moon

NEW YORK, Oct 1 (Reuters) - U.S. stocks started off a newmonth and a new quarter with gains on Tuesday as investorsappeared confident that the first partial government shutdown innearly two decades would be short-lived.

Trading volume was modest, with just about 3.9 billionshares traded with less than two hours to go in the session. Thedaily average volume has been around 6.3 billion shares thisyear.

Congress missed a midnight deadline to agree on a spendingbill, resulting in up to 1 million workers being put on unpaidleave. A bipartisan fight over President Barack Obama'shealthcare law was at the center of the impasse.

The Democratic-led U.S. Senate on Tuesday voted to killRepublicans' latest attempts to modify an emergency governmentfunding bill, stripping proposed amendments from the spendingbill and sending back to the House a "clean" bill that wouldextend funding for government agencies until Nov. 15.

"This time around, the markets have been so blissfullyunconcerned that this hasn't been a problem. It could start tobite now, of course. But for me, the main story is the number ofpeople not receiving paychecks or producing output," said EricLascelles, chief economist at RBC Global Asset Management inToronto.

Lascelles said he estimates that each week the shutdownpersists will shave about 0.1 percentage point fromfourth-quarter GDP.

"It's a material hit but certainly one that can be absorbed.The question will be whether it lasts longer than the marketexpects and starts to bleed into confidence."

The Dow Jones industrial average was up 52.85 points,or 0.35 percent, at 15,182.52. The Standard & Poor's 500 Index was up 11.05 points, or 0.66 percent, at 1,692.60. TheNasdaq Composite Index was up 35.65 points, or 0.95percent, at 3,807.13.

In the latest economic data, the Institute for SupplyManagement's manufacturing index came in at 56.2, up from theprevious month and above expectations for a reading of 55.

But with the closure of federal government agencies, therelease of a report on construction spending in August, whichhad been scheduled for 10 a.m, was delayed. If no deal isreached by Friday, the closely watched payroll report will alsobe delayed.

The report on private sector hiring in September by payrollsprocessor Automatic Data Processing will be released onWednesday at 8:15 a.m. (1215). Weekly initial jobless claimsdata due on Thursday will also be released as scheduled.

Supporting the Nasdaq, shares of Apple Inc rose 2.3percent to $487.64 on news that billionaire activist investorCarl Icahn had dinner with Apple chief executive Tim Cook onMonday and "pushed hard" for a share buyback.

Merck & Co announced a plan to cut annual operatingcosts by $2.5 billion by the end of 2015 and eliminate 8,500jobs. Shares rose 1.2 percent to $48.77, one of the biggestboosts to the S&P 500.

Walgreen Co reported fourth-quarter earnings thatexceeded expectations, helped by a rise in generic drug sales.Shares gained 4.4 percent to $55.15.

Ford Motor Co advanced 2.3 percent to $17.26 after thecompany reported a 6 percent increase in its September sales.General Motors edged up 0.1 percent to $36.02 followingits sales results.

U.S. stocks dropped on Monday as the deadline approachedwithout any apparent progress in breaking the stalemate, givingthe S&P 500 its seventh decline in the last eight trading daysof September. However, some market participants viewed anypullback as a buying opportunity in the absence of an extendedshutdown.

Historically, Wall Street has managed to avoid steepdownside during similar incidents. During the federal governmentshutdown from Dec. 15, 1995 to Jan. 6, 1996, the S&P 500 added0.1 percent. During the Nov. 13 to Nov. 19, 1995, shutdown, thebenchmark index rose 1.3 percent.

Investors were also eyeing the tone of negotiations as apossible template for the upcoming debate on lifting the debtceiling in mid-October, which could result in a default on U.S.debt if not passed. The debt limit issue is considered to have abigger impact on markets.

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