US STOCKS-Wall Street drops as shutdown drags on for third day
* Investors fear debt limit decision will be tied to budget battle
* Boehner says he won't let U.S. default -report
* S&P 500 on track for ninth loss in past 11 sessions
* Growth in the U.S. service sector slows last month
* Indexes down: Dow 0.9 pct, S&P 1.0 pct, Nasdaq 1.3 pct
By Julia Edwards
NEW YORK, Oct 3 (Reuters) - U.S. stocks fell on Wednesday as anxiety over the budget showdown grew on the third day of a government shutdown, though the market came off its lows Thursday after a report that Republican House Speaker John Boehner said he would not let the nation default on its debt.
All three major indexes earlier were down by one percent, as Congress and the White House showed little signs of resolving the budget debate and investors feared the issue could become intertwined with raising the debt ceiling.
The S&P 500 rebounded to 1678.33 from a low of 1670.36 after the New York Times reported, citing a House Republican, that Boehner would prevent a default. A spokesperson for Boehner did not confirm the account to Reuters, saying the votes are not there yet to pass an increase in the debt limit without any other conditions.
The low came during U.S. President Barack Obama's speech, in which he maintained his defiant tone against Republicans, indicating a resolution over the budget may be far off.
"We've heard speech after speech, and the only thing that we continue to hear is that nothing's going to get done," said Sam Ginzburg, head of trading at First New York Securities. "I think ultimately it will. I guess we need a little bit of a scare first for people to finally get to work and get it done."
Weaker-than-expected growth in the U.S. service sector also weighed on stocks. The Institute for Supply Management said its services index fell to 54.4 last month after nearing an eight-year high in August.
The Dow Jones industrial average was down 126.07 points, or 0.83 percent, at 15,007.07. The Standard & Poor's 500 Index was down 14.08 points, or 0.83 percent, at 1,679.79. The Nasdaq Composite Index was down 40.44 points, or 1.06 percent, at 3,774.58.
The situation in Washington has pressured equities, with the S&P 500 having dropped in nine of the past 11 sessions. All 10 S&P sectors fell, with industrial names among the hardest hit. Boeing Co fell 2.7
The Treasury has said the United States will exhaust its borrowing authority no later than Oct. 17. If no deal is reached on raising the debt ceiling, the United States could default on its debt.
The CBOE Volatility Index, the market's favored indicator of Wall Street anxiety, rose 7.5 percent to 17.81.
Goldman Sachs estimated on Wednesday a short-term shutdown would slow U.S. economic growth by about 0.2 percentage point, while a weeks-long disruption could shave 0.4 percentage point off growth, as furloughed workers trim personal spending.
"Overall I think the market reaction has been very muted. I think the longer this stalemate goes on in Washington, the greater the reaction is going to be in the market," said Warren West, principal at Greentree Brokerage Services in Philadelphia.
The weakest sectors Thursday were utilities and industrials. Utilities are generally heavy debt issuers, and West noted that their borrowing costs are vulnerable if rates rise.
"When you think that people on Capitol Hill might just lose their minds and push us over the cliff, are very vulnerable," said West.
"If there's a crisis in the debt markets because we weren't able to get a resolution on the debt ceiling, our borrowing costs are going to go up dramatically."
The utilities sector was down 1.4 percent. Exelon Corp lost 1.9 percent.
Tesla Motors Co shares fell 4.38 percent to $172.84 after an automotive blog published images of a Model S electric sedan in flames after an accident.
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