* S&P 500 drops after best two-day run in a month
* GM surges, automaker will buy back shares from U.S. gov't
* Oracle gains as software sales boost profit
* Dow down 0.5 pct, S&P 500 off 0.6 pct, Nasdaq off 0.2 pct
NEW YORK, Dec 19 U.S. stocks fell on Wednesday as talks to avert a fiscal crisis by the end of the year turned sour following recent progress, even as the market's moderate decline points to expectations that a deal will be reached.
President Barack Obama and congressional Republicans are struggling to come up with a deal to avoid early 2013 tax hikes and spending cuts that many economists say could pull the U.S. economy back into recession.
House Speaker John Boehner said his chamber will pass a proposal that Obama had already threatened to veto as it spares many wealthy Americans from tax hikes needed to balance the budget. Obama has already agreed to reductions in benefits for senior citizens.
"My guess is they're close to a deal, and right before, it looks like the deal is about to blow up either on manufactured or legitimate reasons," said Uri Landesman, president of hedge fund Platinum Partners in New York.
He said if the market thought the deal was off, the S&P 500 would slide below 1,400. It stands now near 1,440, nor far from a two-month high.
The CBOE volatility index surged 10.2 percent to trade above 17, but has remained relatively stable. Its 14- 50- and 200-day averages are all within 1.2 points.
Landesman said the VIX's stability indicates "the bulls have control of this market still."
The Dow Jones industrial average fell 63.01 points, or 0.47 percent, to 13,287.95. The S&P 500 lost 7.77 points, or 0.59 percent, to 1,439.02. The Nasdaq Composite dropped 4.97 points, or 0.16 percent, to 3,049.56.
General Motors bucked the overall weakness to surge 6.7 percent to $27.20 after the company said it will buy back 200 million of its shares from the U.S. Treasury, which plans to sell the rest of its GM stake over the next 15 months.
Banks and energy shares - groups that outperform during periods of economic expansion - have led recent gains, indicating a shift to focusing on a growing economy as Wall Street looks past the budget talks.
The S&P 500 added 2.3 percent over the past two sessions, the first time it has marked two straight days of 1 percent gains since late July.
Defensive sectors led the downside on Wednesday, with the S&P health care sector index down 0.9 percent.
Oracle shares helped cap losses in the Nasdaq after it reported earnings that beat expectations on strong software sales growth. Oracle jumped 3.7 percent to $34.09.
Knight Capital Group Inc climbed 6 percent to $3.53 after it agreed to be bought by Getco Holdings in a deal valued at $1.4 billion. The stock, which nearly collapsed after a trading error in August, remains down about 70 percent so far this year.
Data showed homebuilding permits touched their highest level in nearly 4-1/2 years in November. The PHLX housing index fell 0.6 percent, but is up nearly 70 percent this year as the housing market has turned the corner.