Market slips ahead of "fiscal cliff" bargaining

NEW YORK (Reuters) - Stocks were lower on Friday as investors remained skeptical that a meeting between President Barack Obama and congressional leaders would make progress on dealing with the "fiscal cliff."

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 for its second straight weekly decline of more than 1 percent.

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.

Investors worry that if no deal is reached on the large, automatic budget cuts and tax hikes set to begin next year, the economy could slip into recession.

"This is the first time we've had one iota of anything constructive being done," said Todd Schoenberger, managing principal at the BlackBay Group in New York. "That's very positive, but you can be flexible and still have us go over the cliff. Wall Street traders remain very nervous and need something concrete to get done."

The gathering is set to begin at 10:15 a.m (15:15 GMT) at the White House.

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 24.81 points, or 0.20 percent, at 12,517.57. The Standard & Poor's 500 Index <.spx> was down 2.21 points, or 0.16 percent, at 1,351.12. The Nasdaq Composite Index <.ixic> was down 6.69 points, or 0.24 percent, at 2,830.24.

The S&P is currently down 1.9 percent for the week, while the Dow is off 2.2 percent and the Nasdaq is down 2.5 percent. The S&P 500 sunk to a 3 1/2-month closing low on Thursday and remained well below its 200-day moving average, which it pierced last week.

While the S&P remains up 7.6 percent for the year, what had looked like a stellar 2012 for stocks has turned into merely an average year. Some investors have become more inclined to protect their gains as 2012 draws to a close.

Dell Inc's stock slumped 7.1 percent to $8.88 and was the biggest percentage decliner on the S&P 500 a day after reporting a steep drop in its quarterly profit.

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 11 percent to $51.83.

Gap Inc raised its full-year profit view, easing concerns of a slowdown going into the holiday season and sending shares 1.8 percent higher to $33.85.

J.M. Smucker Co reported a rise in second-quarter earnings, helped by a drop in commodity costs, but the stock fell 3.3 percent to $82.60.

(Editing by Kenneth Barry)

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