UPDATE 5-Brent falls below $108 on worries of U.S. shutdown

* U.S. government faces shutdown on funding impasse

* Market reacts after Obama, Iran's Rouhani talk on phone

* Italy government turmoil piles on uncertainty (Recasts, updates throughout)

By Ron Bousso

LONDON, Sept 30 (Reuters) - Brent crude oil fell more than $1 to below $108 a barrel on Monday, heading for its first monthly decline since May, as a looming U.S. government shutdown clouded the outlook for demand, while tensions over Iran continued to ease.

Brent was down 94 cents to $107.69 a barrel by 1354 GMT, set for a 5.6 percent monthly drop. U.S. crude was down $1.58 at $101.29 a barrel.

"The markets are starting the week on the defensive as the U.S. politicians in Washington D.C. are bringing the U.S. Federal government very close to a shutdown," said oil analyst Dominick Chirichella at Energy Management Institute.

A last-minute deal between Republicans and Democrats to resolve a budget impasse appeared less likely, increasing the chances of the U.S. government shutting down at midnight in Washington for the first time in 17 years.

U.S. stocks opened lower on Monday as investors shifted toward safe havens such as the Japanese yen and Swiss franc.

Concerns that Italy might plunge once again into political turmoil eased after senators from the centre-right party were ready to rebel against Silvio Berlusconi if he continues to threaten to bring down the government.

"Given the political uncertainty prevailing in the U.S. and Italy and the evident rapprochement between the U.S. and Iran, there is a threat of oil retreating further over the next few days towards $105 a barrel (Brent) and $100 a barrel (WTI)," analysts at Commerzbank said.

U.S.-IRAN THAW

U.S. President Barack Obama and new Iranian President Hassan Rouhani spoke by telephone on Friday, the highest-level contact between the two countries in three decades as both sides seek a deal over Iran's nuclear programme.

"The phone call between Obama and Rouhani was a bit late on Friday, so that needs to be priced in, but is the continuation of the improving sentiment over Iran," Olivier Jakob, an analyst at Petromatrix, said.

Exports from Iran have more than halved in recent years to around 1 million barrels per day in 2012 due to tightening sanctions.

Iran's top four crude buyers - China, India, Japan and South Korea - cut their purchases by 16 percent in the first eight months of 2013.

World powers are due to hold a new round of talks over Iran's nuclear programme in mid-October in Geneva.

Supply concerns have also eased in recent weeks as exports from Libya have recovered to above 580,000 barrels per day, following weeks of disruption.

Investors cut their net long positions in Brent for a fourth week in a row to 167,745 contracts, the InterContinental Exchange (ICE) said. (Additional reporting by Florence Tan in Singapore; editing by Jane Baird and Keiron Henderson)

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