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NEW YORK (Reuters) - Global stock markets fell and the dollar dropped against major currencies on Monday as a partial U.S. government shutdown neared reality, with passage of an 11th hour stop-gap spending bill seen as unlikely.
The Democrat-controlled U.S. Senate killed a proposal by the Republican-led House of Representatives to delay President Barack Obama's health care program for a year in return for temporary funding of the federal government beyond Monday.
The bill, which would run through November 15, was aimed at averting a government shutdown. It now goes back to the House, where Republicans will seek a one-year delay of the "individual mandate" as part of an emergency spending bill.
A prolonged shutdown could have a major impact on the U.S. economy and consumer confidence. As many as 1 million federal employees could face unpaid furloughs. But a shutdown is unlikely to affect the country's sovereign credit rating.
President Obama, saying he was not "resigned" to a shutdown, said he planned to talk to congressional leaders later, as well as on Tuesday and Wednesday, but held out no new offer of compromise on his signature health-care law.
Investors are accustomed to political battles in Washington resulting in a last-minute accord and voiced scepticism any shutdown would last for an extended period.
The CBOE's Volatility index, often called Wall Street's fear gauge, jumped to a September high of 17.49, before shedding some losses to trade at 16.60.
"I don't think there is 'panic' per se, although the VIX is near 17, which is higher than what we've been seeing for some time," said Randy Frederick, director of trading and derivatives at Charles Schwab & Co. in Austin, Texas.
The dollar last traded 0.07 percent lower against a basket of six major currencies at 80.233 and was near break-even against the yen, up 0.1 percent at 98.34 yen. The euro rose 0.03 percent at $1.3525.
MSCI's all-country equity stock index was down 0.78 percent, while the broad FTSEurofirst 300 index of regional shares closed down 0.6 percent at 1,247.14.
The Dow Jones industrial average closed down 128.57 points, or 0.84 percent, at 15,129.67. The Standard & Poor's 500 Index fell 10.20 points, or 0.60 percent, at 1,681.55. The Nasdaq Composite Index slipped 10.12 points, or 0.27 percent, at 3,771.48.
Despite a slide since the Federal Reserve surprised the market on September 18 by not starting to trim its stimulus program, stocks closed the month and quarter higher.
The Dow rose 2.2 percent, the S&P gained 3.0 percent and the Nasdaq 5.1 percent for the month. Over the quarter the Dow rose 1.5 percent, the S&P 4.7 percent and the Nasdaq 10.8 percent.
Shares of defence companies declined, as a prolonged government shutdown would most likely diminish the amount of new contracts. Raytheon Co closed 1.4 percent lower at $77.07 and Lockheed Martin Corp fell 1.3 percent to $127.55, while Boeing Co slipped 1.1 percent to $117.50.
The PHLX defence sector slid 0.82 percent.
Wall Street has weathered similar incidents in the past. During a shutdown from December 15, 1995, to January 6, 1996, the S&P 500 added 0.1 percent. During the November 13-19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.
That pattern of gains may not hold this time, given that economic growth continues to be weak. Wall Street may also be ripe for a sell-off, with the S&P near an all-time high after having escaped any sustained pullback so far this year.
In the latest economic data, the Chicago Purchasing Managers index rose more than expected in September, climbing to a reading of 55.7 from 53 the previous month. Analysts were expecting a reading of 54.
Fears of a U.S. government shutdown supported safe-haven demand for bonds, sending benchmark yields to their lowest in seven weeks.
U.S. government debt was on track to post its first monthly gain since April and to eke out its first quarterly rise since a year ago, according to Bank of America Merrill Lynch.
"The best way to say what the market is doing right now is that it's pricing in a partial government shutdown," said John Herrmann, director of interest rates strategy at Mitsubishi UFJ Securities in New York.
U.S. Treasuries prices rose in choppy trade, with the benchmark 10-year U.S. Treasury bond up 4/32 in price to yield 2.6118 percent.
Brent crude oil fell, heading for its first monthly decline since May, as the looming U.S. government shutdown clouded the outlook for demand, while tensions over Iran continued to ease.
Brent fell 26 cents to settle at $108.37 a barrel. U.S. crude settled down 54 cents at $102.33 a barrel.
Gold prices posted their best quarter in a year, gaining almost 8 percent, but fell during the session on the impasse in Washington.
Spot gold was down 0.5 percent at $1,328.74 an ounce, while U.S. Comex gold futures for December delivery settled down $12.20 at $1,327 an ounce.
Additional reporting by Richard Hubbard in London, and Ryan Vlastelica and Richard Leong in New York; Editing by Dan Grebler, Leslie Adler and Nick Zieminski