US STOCKS-Wall St rebounds as investors expect shutdown to be short-lived

* U.S. government shutdown could hurt markets if prolonged

* Apple (NasdaqGS: AAPL - news) shares jump on Icahn dinner with CEO Cook

* Indexes up: Dow 0.4 pct, S&P 0.7 pct, Nasdaq 0.9 pct

By Angela Moon

NEW YORK, Oct (KOSDAQ: 039200.KQ - news) 1 (Reuters) - U.S. stocks started off a new month and a new quarter with gains on Tuesday as investors appeared confident that the first partial government shutdown in nearly two decades would be short-lived.

Trading volume was modest, with just about 3.9 billion shares traded with less than two hours to go in the session. The daily average volume has been around 6.3 billion shares this year.

Congress missed a midnight deadline to agree on a spending bill, resulting in up to 1 million workers being put on unpaid leave. A bipartisan fight over President Barack Obama's healthcare law was at the center of the impasse.

The Democratic-led U.S. Senate on Tuesday voted to kill Republicans' latest attempts to modify an emergency government funding bill, stripping proposed amendments from the spending bill and sending back to the House a "clean" bill that would extend funding for government agencies until Nov. 15.

"This time around, the markets have been so blissfully unconcerned that this hasn't been a problem. It could start to bite now, of course. But for me, the main story is the number of people not receiving paychecks or producing output," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

Lascelles said he estimates that each week the shutdown persists will shave about 0.1 percentage point from fourth-quarter GDP.

"It's a material hit but certainly one that can be absorbed. The question will be whether it lasts longer than the market expects and starts to bleed into confidence."

The Dow Jones industrial average was up 52.85 points, or 0.35 percent, at 15,182.52. The Standard & Poor's 500 Index was up 11.05 points, or 0.66 percent, at 1,692.60. The Nasdaq Composite Index was up 35.65 points, or 0.95 percent, at 3,807.13.

In the latest economic data, the Institute for Supply Management's manufacturing index came in at 56.2, up from the previous month and above expectations for a reading of 55.

But with the closure of federal government agencies, the release of a report on construction spending in August, which had been scheduled for 10 a.m, was delayed. If no deal is reached by Friday, the closely watched payroll report will also be delayed.

The report on private sector hiring in September by payrolls processor Automatic Data Processing (NasdaqGS: ADP - news) will be released on Wednesday at 8:15 a.m. (1215). Weekly initial jobless claims data due on Thursday will also be released as scheduled.

Supporting the Nasdaq, shares of Apple Inc rose 2.3 percent to $487.64 on news that billionaire activist investor Carl Icahn had dinner with Apple chief executive Tim Cook on Monday and "pushed hard" for a share buyback.

Merck & Co announced a plan to cut annual operating costs by $2.5 billion by the end of 2015 and eliminate 8,500 jobs. Shares rose 1.2 percent to $48.77, one of the biggest boosts to the S&P 500.

Walgreen Co (NYSE: WAG - news) reported fourth-quarter earnings that exceeded expectations, helped by a rise in generic drug sales. Shares gained 4.4 percent to $55.15.

Ford Motor Co (NYSE: F - news) advanced 2.3 percent to $17.26 after the company reported a 6 percent increase in its September sales. General Motors (NYSE: GM - news) edged up 0.1 percent to $36.02 following its sales results.

U.S. stocks dropped on Monday as the deadline approached without any apparent progress in breaking the stalemate, giving the S&P 500 its seventh decline in the last eight trading days of September. However, some market participants viewed any pullback as a buying opportunity in the absence of an extended shutdown.

Historically, Wall Street has managed to avoid steep downside during similar incidents. During the federal government shutdown from Dec. 15, 1995 to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov. 13 to Nov. 19, 1995, shutdown, the benchmark index rose 1.3 percent.

Investors were also eyeing the tone of negotiations as a possible template for the upcoming debate on lifting the debt ceiling in mid-October, which could result in a default on U.S. debt if not passed. The debt limit issue is considered to have a bigger impact on markets.