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US STOCKS-Wall St down after two-week decline as Washington deadlocked

* Debt ceiling deadline draws closer

* Wall St's fear gauge CBOE VIX jumps to highest since June

* Indexes off: Dow 0.6 pct, S&P 500 0.5 pct, Nasdaq 0.5 pct

By Angela Moon and Julia Edwards

NEW YORK, Oct 7 (Reuters) - U.S. stocks fell on Monday with the Dow and the S&P 500 adding to their two-week decline as the U.S. government shutdown dragged on with no signs politicians were willing to relax positions over the debt-ceiling limit or budget impasse.

Reflecting a rise in the level of investor anxiety, the CBOE Volatility index VIX, Wall Street's so-called fear gauge, jumped 8.8 percent to 18.22, its highest since late June.

As the U.S. government neared the second week of a shutdown with no end in sight, a deadlocked U.S. Congress also confronted an Oct. 17 deadline to increase the nation's borrowing power or risk default.

In comments on Sunday television political talk shows, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

"The market is obviously showing some unnecessary worries, while at the same time preparing for earnings season," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

He added that the earnings season will be a "repeat what we saw last time with most companies beating their expectations with revenue not being so good."

The S&P 500 has fallen for two weeks and is down nearly 3 percent from its all-time high of 1,725.52 on concerns about the effect of Washington dysfunction on the economy.

Financials and energy sectors were among the worst performers. Exxon Mobil Corp shares were down 0.5 percent to $85.88, and Wells Fargo & Co shares were off 1.3 percent to $40.75.

The Dow Jones industrial average was down 93.99 points, or 0.62 percent, at 14,978.59. The Standard & Poor's 500 Index was down 8.54 points, or 0.51 percent, at 1,681.96. The Nasdaq Composite Index was down 19.15 points, or 0.50 percent, at 3,788.61.

Among gainers, Apple shares rose 1.7 percent to $491.48 after Jefferies raised the stock to a buy rating from hold. Its price target was also moved to $600, from $425.

U.S.-listed shares of BlackBerry rose 4 percent to $8.00 after sources close to the matter said it is in talks with Cisco Systems, Google Inc and SAP about selling all or part of BlackBerry.