Wall Street slips as "fiscal cliff" bargaining begins

NEW YORK (Reuters) - Stocks fell moderately on Friday in an atmosphere of caution as President Barack Obama and congressional leaders began bargaining on a deal to avoid major tax hikes and spending cuts.

The looming "fiscal cliff" has become the market's main focus since Obama's re-election on November 6, sending stocks lower on fears it could knock the economy into recession next year.

The S&P 500 was on track to decline for a fourth day.

"Today is the most important day of the week, as finally the president will have a coffee talk with both Republican and Democratic leaders. While both sides are now using the 'balance' word, the rhetoric seems to have only been on the tax side, which solves little or nothing on the spending side," said Peter Boockvar, managing director at Miller Tabak & Co in New York.

If investors like what they hear after the meeting, "the market is very oversold, sentiment is negative and is thus set up for a short-term bounce," he said.

Futures had indicated a higher open after the Wall Street Journal reported White House officials were in discussions that could indicate increased flexibility in negotiations with Republicans. Still, caution remains and the S&P 500 is on track to end the week at least 2 percent lower.

Citing sources familiar with the matter, the Journal said officials were in advanced, internal talks to replace spending cuts set to begin in January with a separate package of spending cuts and tax increases. The White House had no comment on the report.

Democrats and Republicans have recently appeared to dig in their heels into opposing positions, echoing last year's political impasse over raising the U.S. debt ceiling.

The S&P is down 4.3 percent over the past two weeks, with such sectors as financials <.gspf> and materials <.gspm> among the hardest hit.

Energy shares have been stronger as crude oil advanced. A flare-up in violence in the Middle East lifted oil prices on concerns about a possible supply disruption. Brent crude is up 3 percent over the past two weeks.

The Dow Jones industrial average <.dji> was down 27.03 points, or 0.22 percent, at 12,515.35. The Standard & Poor's 500 Index <.spx> was down 5.11 points, or 0.38 percent, at 1,348.22. The Nasdaq Composite Index <.ixic> was down 9.66 points, or 0.34 percent, at 2,827.28.

The S&P and the Dow are currently down about 2.3 percent for the week while the Nasdaq is down about 2.7 percent.

Dell Inc's stock slumped 8.1 percent to $8.80 and was the biggest percentage decliner on the S&P 500 a day after reporting a steep drop in its quarterly profit.

Shares of Penn National Gaming Inc jumped 30 percent to $48.65 after the owner of gaming and pari-mutuel properties said late Thursday it will split its business into two separate publicly traded companies - a gaming focused real estate investment trust and a gaming operator.

Sears Holdings Corp late Thursday reported a quarterly loss that was narrower than expected, but same-store sales fell on weak demand for electronics, sending shares down 14.8 percent to $49.80.

J.M. Smucker Co reported a rise in second-quarter earnings, helped by a drop in commodity costs, but the stock fell 3.4 percent to $82.45.

(Editing by Kenneth Barry)

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