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Stocks close higher as markets shrug off government shutdown

Stocks kicked off the first trading day of the quarter on Tuesday with modest gains, lifted by an upbeat manufacturing report as investors seemed to shrug off the first partial government shutdown since 1996.

(Read more: Washington has become 'Land of Oz': Citi chief economist)

"The market's going to be sanguine about this because [politicians have] found a way to solve this in the past," said Tim Hopper, chief economist at TIAA-CREF. "We're approaching this as an event that creates volatility, not a trend that changes market direction. And on the economic realm, this is going to have a small-scale impact to growth."

The Dow Jones Industrial Average closed 62 points higher, led by Merck.

The S&P 500 also rose and the Nasdaq put on 46 points, or 1.2 percent, to close at 3817.98. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, slid below 16.

All key S&P sectors finished higher, lifted by health care and techs.

(Read more: Government shutdown? Honey badger market doesn't care)

The White House ordered federal departments to execute shutdown plans, leaving nearly 800,000 people out of work, after Democrats and Republicans failed to agree on a spending bill before Monday's midnight deadline. The Senate twice rejected the House of Representatives' demands to delay portions of the Obamacare health insurance bill. Now, the two parties must strike a deal on raising the federal borrowing limit to avoid a debt default by October 17.

This is the first partial federal shutdown since 1996, and it is uncertain for how long it might last.

(Read more:'Obamacare' exchanges start up as govt shuts down)

President Obama criticized House Tea Party members for shutting down the government over an "ideological crusade" on health- care reform, adding that the longer the shutdown continues, the worse the impact will be.

On the economic front, the manufacturing sector expanded at its fastest pace in almost 2-1/2 years in September, according to the Institute for Supply Management (ISM).

Meanwhile, the report on construction spending for August, which had been scheduled for 10 am ET was canceled due to the government shutdown. And the Labor Department's Bureau of Labor Statistics said the nonfarm payrolls report will not be released on Friday.

The Labor Department will still publish its weekly jobless claims reports as usual on Thursday.

Daiwa Capital Markets' Grant Lewis said the negative impact on growth would be directly proportional to the length of the shutdown.

"With the deadline to extend the debt ceiling also rapidly approaching, the longer there is no agreement on getting the government back up and running, the greater concerns will be over getting agreement on the debt ceiling, further fueling economic uncertainty," he wrote in a note.

Meanwhile, Apple climbed near session highs after billionaire investor Carl Icahn said he "pushed hard" for a $150 billion buyback during his dinner meeting with CEO Tim Cook on Monday.

Ford climbed after the automaker posted a 6-percent increase in its September sales. Meanwhile, rival General Motors edged lower after the car maker's sales declined 11 percent in the same period.

Stocks in Asia and Europe mostly moved higher on Tuesday, with Italian stocks paring losses from the previous session's heavy selling. The country's benchmark FTSE MIB recovered somewhat on reports that Silvio Berlusconi's center-right party could rebel if he continues to threaten to bring down the government.

(Read more: Italian companies implode amid government turmoil)

Meanwhile, Japan's benchmark index pared gains, following an earlier 1 percent spike after Prime Minister Shinzo Abe decided to raise the national sales tax to 8 percent from 5 percent. Investors now expect a hefty stimulus package worth $50 billion to help mitigate the tax hike impact.