* Dollar index at lowest since February
* U.S. equity market still on track for positive September
* Brent hovers at $108 a barrel on worries of U.S. shutdown
* Bond prices gain in safe-haven bid
By Herbert Lash
NEW YORK, Sept 30 Global stock markets fell and the dollar dropped against major currencies on Monday as a partial U.S. government shutdown neared reality, with passage of an 11th hour stop-gap spending bill seen as unlikely.
The Democrat-controlled U.S. Senate killed a proposal by the Republican-led House of Representatives to delay Obamacare for a year in return for temporary funding of the federal government beyond Monday.
The bill, which would run through Nov. 15, is aimed at averting a government shutdown. It now goes back to the House, where Republicans will seek a one-year delay of the "individual mandate" as part of an emergency spending bill.
But House Speaker John Boehner earlier showed no sign of backing down from Republican insistence on linking the bill to a delay in President Barack Obama's signature health-care law.
A prolonged shutdown could have a major impact on the U.S. economy and consumer confidence. As many as 1 million federal employees could face unpaid furloughs.
Obama said he planned to talk to congressional leaders later on Monday, as well as on Tuesday and Wednesday, but held out no new offer of compromise. The president said he was not "resigned" to a shutdown.
U.S. stocks pared some of their losses late in the session, with the Nasdaq trading close to break-even. Investors are accustomed to political battles in Washington resulting in a last-minute accord and voiced skepticism any shutdown would last for an extended period.
The CBOE's Volatility index, often called Wall Street's fear gauge, jumped to a September high of 17.49, before shedding some losses to trade at 16.40.
"I don't think there is 'panic' per se, although the VIX is near 17, which is higher than what we've been seeing for some time," said Randy Frederick, director of trading and derivatives at Charles Schwab & Co in Austin, Texas.
The dollar last traded 0.39 percent lower against a basket of six major currencies at 80.209 and was near break-even against the yen, up 0.03 percent at 98.28 yen. The euro rose 0.04 percent at $1.3528.
MSCI's all-country equity stock index was down 0.7 percent, while the broad FTSEurofirst 300 index of regional shares closed down 0.6 percent at 1,247.14.
The Dow Jones industrial average was down 100.83 points, or 0.66 percent, at 15,157.41. The Standard & Poor's 500 Index was down 7.62 points, or 0.45 percent, at 1,684.13. The Nasdaq Composite Index was down 6.84 points, or 0.18 percent, at 3,774.76.
Defense names declined, as a prolonged government shutdown would most likely diminish the amount of new contracts. Raytheon Co fell 1.1 percent to $77.36, and Lockheed Martin Corp fell 0.9 percent to $128.02, while Boeing Co slipped 0.8 percent to $117.80.
The PHLX defense sector was off 0.45 percent.
Wall Street has weathered similar incidents in the past. During a shutdown from Dec. 15, 1995, to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov. 13-19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.
That pattern of gains may not hold this time, given that economic growth continues to be weak. Wall Street may also be ripe for a selloff, with the S&P near an all-time high after having escaped any sustained pullback so far this year.
In the latest economic data, the Chicago Purchasing Managers index rose more than expected in September, climbing to a reading of 55.7 from 53 the previous month. Analysts were expecting a reading of 54.
Fears of a U.S. government shutdown supported safe-haven demand for bonds, sending benchmark yields to their lowest in seven weeks.
U.S. government debt was on track to post its first monthly gain since April and to eke out its first quarterly rise since a year ago, according to Bank of America Merrill Lynch.
"The best way to say what the market is doing right now is that it's pricing in a partial government shutdown," said John Herrmann, director of interest rates strategy at Mitsubishi UFJ Securities in New York.
U.S. Treasuries prices rose in choppy trade, with the benchmark 10-year U.S. Treasury bond up 2/32 in price to yield 2.6209 percent.
Brent crude oil fell, heading for its first monthly decline since May, as the looming U.S. government shutdown clouded the outlook for demand, while tensions over Iran continued to ease.
Brent fell 26 cents to settle at $108.37 a barrel. U.S. crude settled down 54 cents at $102.33 a barrel.