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* Fitch puts U.S. rating on rating watch negative, futures fall
* House Republicans divided over solution to fiscal impasse
* Citigroup profit hit by bond trading slowdown, shares fall
* Intel and Yahoo both rise after market close on results
* Indexes off: Dow 0.9 pct; S&P 0.7 pct; Nasdaq 0.6 pct
By Ryan Vlastelica
NEW YORK, Oct 15 (Reuters) - U.S. stocks fell in a volatile session on Tuesday as the impasse over the debt ceiling in Washington continued with no sign of progress toward a resolution.
After the market closed, futures indicated continued pressure after Fitch Ratings placed the United States' 'AAA' rating on rating watch negative, citing the debt ceiling gridlock.
"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default," the rating agency wrote in a statement.
The move echoed a similar action by Standard & Poor's in August 2011, when the agency downgraded the U.S. credit rating because of political gridlock related to the debt ceiling.
Futures fell, with S&P 500 futures down 10.7 points, Dow Jones industrial average futures off 122 points and Nasdaq 100 futures down 7.5 points.
"The last time this sort of thing happened, the practical effect on markets wasn't significant. But this time, I don't know what the impact could be," said John Carey, portfolio manager at Pioneer Investment Management in Boston, which has about $200 billion in assets under management.
"At some point this will really start to matter, and if nothing else, it highlights the concern people have about the budgetary situation. It lets investors know that this kind of risk is on the horizon."
During Tuesday's session, traders held off making big bets given the political uncertainty, which overshadowed some key corporate earnings. Selling accelerated during the afternoon after Senator Richard Durbin said Senate negotiations had been suspended until House Speaker John Boehner can work out a fiscal plan that can proceed in the House of Representatives.
Losses were broad, with all 10 S&P 500 sectors falling on the day. Three-fourths of stocks traded on the New York Stock Exchange ended lower, while 68 percent of Nasdaq-listed shares fell.
The Dow Jones industrial average ended down 133.25 points, or 0.87 percent, at 15,168.01. The Standard & Poor's 500 Index was down 12.08 points, or 0.71 percent, at 1,698.06. The Nasdaq Composite Index was down 21.26 points, or 0.56 percent, at 3,794.01.
Despite the day's decline, the S&P remains above its key moving averages, which have been serving as support. The index is currently about 0.6 percent above its 14-day moving average.
Lawmakers have until Oct. 17 to agree to extend the $16.7 trillion U.S. borrowing limit or the country will risk an unprecedented debt default. The White House and Senate rejected the House's latest offer, while Republican leaders also failed to get support for the plan from rank and file members within their party.
Markets have largely avoided steep losses on optimism that lawmakers would agree to end the partial government shutdown and raise the debt ceiling. At the same time, volatility has spiked as the deadline approaches with little obvious progress. The CBOE Volatility index jumped 16 percent and is up more than 40 percent over the past four weeks.
"The odds that there won't be a deal over the next month are near zero, but there is some chance we won't see something by the 17th. If that happens ... we could easily correct 3-5 percent," said Jim McDonald, who helps oversee $803 billion as chief investment strategist at Chicago-based Northern Trust Global Investments.
"While the market has climbed over the past two weeks," he added, "that would reverse if there was any real concern" about missing the deadline.
Among other assets, crude oil fell 1.5 percent, while gold, which is viewed as a safe haven, rose 0.7 percent.
The situation in Washington has driven trading lately, overshadowing the beginning of a busy week of earnings. Citigroup Inc reported weaker-than-expected results as the bank was hit by a double-digit drop in bond trading revenue for the quarter, sending its shares down 1.5 percent to $48.86.
Johnson & Johnson reported stronger-than-expected quarterly results on strong growth for its prescription drugs, while Coca-Cola Co reported revenue slightly under expectations.
J&J rose 0.1 percent to $89.93 while Coca-Cola fell 0.7 percent to $37.66. Both companies are Dow components.
Intel Corp shares reversed early gains and fell 0.9 percent after the market closed after it reported revenue that topped expectations. Yahoo Inc also lost its initial post-market gains, trading flat after its results, while CSX Corp held on to slight after-hour gains.
Shares of Teradata Corp fell 18.4 percent to $42.91, a day after the data analytics firm cut its full-year earnings forecast.
With 7 percent of S&P 500 companies having reported, 52.8 percent have reported profits that topped expectations, according to Thomson Reuters data, below the historical average of 63 percent. There have also been fewer companies beating revenue forecasts this quarter.
FedEx, the world's No. 2 package carrier, authorized a share repurchase program of up to 32 million of its outstanding shares of common stock, sending its shares up 4.1 percent to $120.08.
On the downside, J.C. Penney Co Inc sank 8.9 percent to $7.17 as a company spokesperson denied a market rumor that the department store chain had hired bankruptcy counsel. The stock has fallen 63 percent so far this year.
Data showed the pace of growth in New York state's manufacturing sector slipped this month to its slowest since May, but business optimism stayed strong.