Stock futures edge higher hours before "cliff" deadline

NEW YORK (Reuters) - Stock futures edged higher on Monday after a five-session losing streak as political leaders in Washington worked against the clock to keep the United States from going over the "fiscal cliff."

Negotiations continued between top lawmakers and the White House on how to head off $600 billion in automatic tax hikes and spending cuts that kick in January 1 and could drag the economy in recession.

The lack of panic on markets so far suggests investors still expect officials to find a solution to the budget problems early in the New Year. The measures that kick in on January 1 will have only a gradual impact.

The Democrat-controlled Senate reconvenes on Monday with only hours to find a legislative solution, most likely a stop-gap deal, that would also have to be passed by the Republican-majority House of Representatives.

Despite the gains in futures, stocks still could fall on Monday when the cash markets open if there is no sign lawmakers are making progress.

"I expect today's move to be exaggerated considering that it will be a light volume day. The market is hopeful that there will be some kind of temporary fix here, so if we don't see a deal here, not even a mini deal, I suspect the market could sell off," said Peter Cardillo, chief market analyst for Rockwell Global Capital in New York.

While midnight on Monday marks the deadline for a deal, the government can pass legislation in 2013 that retroactively prevents the United States going over the fiscal cliff, an option that is viewed as politically easier.

S&P 500 futures rose 3 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures added 23 points, while Nasdaq 100 futures dropped 2.5 points.

European markets were slightly down on Monday morning, although trading was muted as markets in Germany, Switzerland, Italy, Denmark, Norway, and Sweden were closed while British, French, Dutch and Spanish markets were only open for half a session. <.EU>

U.S. stocks dropped on Friday, with significant losses in the last minutes of trading, as prospects for a deal worsened at the beginning of the weekend.

The S&P 500 closed at 1,402.43 at 4 p.m. on Friday, down 1.1 percent, but futures continued to fall before closing 15 minutes later with a loss of 1.9 percent. S&P futures and the S&P cash index do not match point-by-point, but the size of the disparity on Monday points to a weak opening in stocks.

On Sunday, President Barack Obama, appearing on NBC's "Meet the Press," said investors could begin to show greater concerns in the new year.

Investors have remained relatively sanguine about the process, believing it will eventually be solved. In the past two months markets have not shown the kind of volatility that was present during the fight to raise the debt ceiling in 2011.

Rather, equities have largely performed well in the last two months despite constant chatter about the fiscal cliff, though the last few days showed increased worry. The Dow industrials and the S&P 500 each lost 1.9 percent last week after stocks fell for five straight sessions, which marked the S&P 500's longest losing streak in three months.

The CBOE Volatility Index <.VIX> rose to its highest level since June on Friday, closing at 22.72.

(Reporting By Angela Moon; Editing by Kenneth Barry)