By Angela Moon
NEW YORK (Reuters) - U.S. stocks rebounded on Friday, but major stock indexes ended the week lower as a federal government shutdown continued for a fourth day, with no sign of an end to a budget stalemate in Washington.
The Nasdaq composite index ended the week higher as Friday's advance accelerated in the afternoon, but gains by the Dow and the S&P 500 were not enough to cancel the week's losses.
Political wrangling continued as House Speaker John Boehner and House Majority Leader Eric Cantor reiterated Republicans' call for negotiations by Democrats, but they did not indicate any change in their positions.
The government shutdown has made investors nervous as it drags on, but the impact from it has been relatively limited.
A more serious concern, investors say, is if the shutdown continues and the budget battle becomes tied up with the federal debt limit, which a divided Congress must raise by October 17 to avoid an unprecedented U.S. debt default.
"I think the market will be in a much nastier mood next week if we still don't have a deal," said Joseph Quinlan, chief market strategist at U.S. Trust Private Wealth Management.
Reflecting a rise in investor anxiety, some options investors were starting to pay more for protection against market turmoil.
The CBOE Volatility Index VIX (.VIX), a 30-day forecast of stock market volatility measured using a strip of near-term S&P 500 options, rose to 16.73 on Friday from 13.12 on September 20, a sign of increased worry, although this level is still considered low.
Heavy buying activity on Thursday was seen in October and November VIX out-of-the money call options - contracts that are far from the current level - with heavy open interest additions in November contracts.
"This suggests traders are feeling the need to be protected through mid-November and implies that the market expects negotiations in Washington over the government shutdown and debt ceiling will be long and drawn out," said Matt Franz, investment adviser representative at Stutland Volatility Group.
The Dow Jones industrial average (^DJI) was up 76.10 points, or 0.51 percent, at 15,072.58. The Standard & Poor's 500 Index (^GSPC) rose 11.84 points, or 0.71 percent, at 1,690.50. The Nasdaq Composite Index (^IXIC) was up 33.41 points, or 0.89 percent, at 3,807.75.
For the week, the Dow fell 1.2 percent, the S&P 500 lost 0.1 percent while the Nasdaq added 0.7 percent. The S&P 500 (^GSPC) has fallen for nine of the past 12 sessions.
The S&P's biggest loser on Friday was struggling retailer J.C. Penney Co (JCP) fell to its lowest in more than 30 years, ending down 6.5 percent at $7.86.
Potbelly Corp (PBPB.O) said late Thursday its initial public offering of 7.5 million shares had priced at $14 each. In its first day of trading, the stock more than doubled to $31.84, with more than 14 million shares changing hands. The stock closed up 119.8 percent at $30.77.
Government economic reports have been delayed by the shutdown, and the September payrolls report from the Labor Department was not released Friday as scheduled.
Twitter Inc gave potential investors their first glance at its financials on Thursday when it filed for an initial public offering. The information showed that revenue at the social networking company almost tripled in 2012, but it posted a loss in the first half of 2013.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the shutdown would hurt growth in the last quarter of this year, while the Bank of Japan said an extended budget standoff would have a severe global impact.
Trading volume totaled about 5.2 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE MKT, below the average daily closing volume of about 6.1 billion this year.
Advancing stocks outnumbered declining stocks by 1,967 to 995. On the Nasdaq, advancing stocks beat decliners by 1,741 to 779.
(Reporting by Angela Moon; Editing by Kenneth Barry)