* Possibility of budget deal before midnight seen as remote
* All S&P 500 sectors fall; energy drops
* Major indexes still on track for positive September
* Indexes down: Dow 0.68 pct, S&P 0.55 pct, Nasdaq 0.38 pct
By Chuck Mikolajczak
NEW YORK, Sept 30 (Reuters) - U.S. stocks fell on Monday as the chance of a last-minute deal to resolve a budget impasse in Washington appeared dim, moving the government closer to a partial shutdown.
Losses were broad, with each of the ten major S&P 500 sectors lower on the day, led by energy and financials shares.
But the S&P 500 index managed to cut its initial losses almost in half, as market participants have grown accustomed to political battles in Washington resulting in a last-minute accord.
"Quite frankly, ultimately there will be some kind of compromise in Washington. I don't think there will end up being an extended government shutdown," said Stephen Massocca, managing director, Wedbush Equity Management LLC in San Francisco.
"Everyone always hardens their positions right before a compromise happens."
The House of Representatives early on Sunday voted for an emergency spending bill that includes a one-year delay of President Barack Obama's signature healthcare overhaul despite threats of a veto from the White House. The Democratic-controlled Senate reconvenes on Monday at 2 p.m. (1800 GMT).
A shutdown would have wide-ranging implications for a most types of assets. If a deal is reached quickly, markets might recover, but a prolonged shutdown could do significant harm to the economy and consumer confidence. While a deal could still be reached before the government's fiscal year ends at midnight on Monday, such a possibility was considered unlikely.
Up to 1 million government employees could be furloughed without a deal and, if the shutdown takes place, the Labor Department will postpone issuing its closely watched monthly employment report scheduled for Friday.
Energy shares slumped 1.1 percent, dropping alongside a 1 percent fall in U.S. crude oil prices as the possible government shutdown stoked demand concerns. Exxon Mobil fell 1.1 percent to $85.92 while Occidental Petroleum sank 1.7 percent to $92.83.
Defense names also declined, as a government shutdown would most likely diminish the amount of new contracts being granted. Raytheon Co fell 1.1 percent to $77.35 and Alliant Techsystems Inc lost 1 percent to $97.20. The PHLX defense sector declined 0.7 percent.
The Dow Jones industrial average fell 104.17 points or 0.68 percent, to 15,154.07, the S&P 500 lost 9.25 points or 0.55 percent, to 1,682.5 and the Nasdaq Composite dropped 14.41 points or 0.38 percent, to 3,767.19.
Reflecting the uncertainty in Washington, the CBOE Volatility index gained 9.39 percent. The index has risen more than 20 percent in the last three sessions.
The S&P managed to find support at its 50-day moving average of 1,679.96, breaking below that level then quickly rebounding.
For September, the Dow is up 2.3 percent, the S&P is up 3 percent and the Nasdaq is up 4.9 percent.
The Chicago Purchasing Managers index rose more than expected in September, climbing to 55.7 from 53 in the previous month. Analysts were expecting a reading of 54. The positive data had little lasting impact on the market's gloomy tone.
In company news, Active Network Inc jumped 25.9 percent to $14.35 after the company said it would be taken private by Vista Equity Partners for $1.05 billion.