US STOCKS-Wall St retreats as shutdown drags on for third day
* Boehner indicates flexibility on debt limit- NY Times
* Gunfire forces brief lockdown at U.S. Capitol in Washington
* Obama urges House Speaker to call a vote on funding bill
* Fed's Lockhart says gov't shutdown to hurt U.S. growth
* Indexes off: Dow 0.7 pct, S&P 0.7 pct, Nasdaq 0.9 pct
By Angela Moon
NEW YORK, Oct 3 (Reuters) - Wall Street retreated for a second straight day on Thursday as anxiety over the budget showdown grew on the third day of a U.S. government shutdown.
U.S. stocks extended losses in late afternoon after shots were fired outside the U.S. Capitol but quickly recovered.
The Capitol was locked down briefly after the shots were fired. The House and Senate were in session at the time.
Helping stocks to trim losses, the New York Times reported that House Speaker John Boehner told colleagues that he would not let the United States default on its debt.
A representative 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 fact is that every day we are looming closer and closer to the debt ceiling issue, which is the real concern," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp in Austin, Texas.
"While market losses haven't been too big during shutdowns, we did retreat about 17 percent in summer of 2011 just before raising the debt ceiling."
The CBOE Volatility Index (.VIX), often used to measure investor anxiety, jumped as high as 18.71, its highest level since late June.
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.
Earlier in the day, President Barack Obama challenged Republicans to "stop this farce" by allowing a straight vote on a spending bill.
The Dow Jones industrial average was down 101.47 points, or 0.67 percent, at 15,031.67. The Standard & Poor's 500 Index was down 11.76 points, or 0.69 percent, at 1,682.11. The Nasdaq Composite Index was down 35.55 points, or 0.93 percent, at 3,779.47.
The S&P 500 has dropped in nine of the past 11 sessions. All 10 S&P sectors fell, with utilities and industrial names among the hardest hit, down 1 percent and down 0.9 percent, respectively.
In economic news, the Institute for Supply Management said its services index fell to 54.4 last month after nearing an eight-year high in August.
Tesla Motors Co shares fell 3.8 percent to $174.16 after an automotive blog published images of a Model S electric sedan in flames after an accident.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said the partial shutdown of the U.S. government will hurt growth in the last quarter of this year and the Fed's decision not to taper its bond buying stimulus of the economy was vindicated by the fiscal impasse.