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By Angela Moon
NEW YORK, Dec 31 (Reuters) - U.S. stocks were set for a flat open on the last trading day of the year on Monday as political leaders in Washington struggled to find a bipartisan agreement that would keep the United States from going over the "fiscal cliff."
Negotiations continued between top lawmakers and the White House on how to head off the fiscal cliff - $600 billion in automatic tax hikes and spending cuts that kick in Jan. 1. Economists say it could drag the economy in recession.
A Republican Senate leadership aide described discussions between Senate Republican leader Mitch McConnell and Vice President Joe Biden as "good talks," saying they lasted late into Sunday evening.
The lack of panic suggests investors still expect officials to find a solution to the budget problems early in the New Year.
Despite recent nervousness over the stalemate in U.S. budget talks, the S&P 500 is up 11.5 percent for the year compared with a nearly flat performance in 2011. The Dow industrials are up 5.9 percent and the Nasdaq composite is up 13.6 percent for 2012.
The Democrat-controlled Senate reconvenes later in the day, 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.
"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 is 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 12.5 points, in line with 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 89 points, while Nasdaq 100 futures dropped 2.5 points.
Also supporting the market, activity in China's vast manufacturing sector achieved its fastest pace in December since May 2011, a survey of private factory managers showed, with a sub-index for new orders pointing to continued strength in the new year.
European shares ended slightly higher in the final truncated trading session of 2012, but investors were unwilling to take on much risk, given the U.S. budget crisis and after strong year-to-date gains.
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.
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, buoyed by signs of economic recovery, an improving housing market and monetary policy designed to stimulate growth and lower unemployment.