* U.S. govt shutdown to start after negotiations fail
* Yen bounces off one-month high ahead of PM's tax plan
By Dominic Lau
TOKYO, Oct 1 (Reuters) - The dollar held near a 7-1/2 month low against a basket of currencies on Tuesday as much of the U.S. government began to shut down after Congress failed to agree a compromise bill to fund government operations.
Competing spending measures flew back and forth between Republican-controlled House of Representatives and Democratic-led Senate late into Monday night in Washington but Congress deadlocked over efforts by some Republicans to use the temporary spending bill to delay implementation of President Barack Obama's health care programme.
The shutdown comes a few weeks ahead of the next political battle; to raise the federal government's debt ceiling. Failure to increase the borrowing limit by mid-October could result in a historic U.S. debt default that would threaten the U.S. economy and send ripples around the globe.
"Risk assets have been sold off in the last few days ahead of the actual news of the shutdown," said Tim Condon, chief economist for Asia at ING in Singapore. "It's already priced in."
"The consensus view, which I share, is that the government can remain shut down for a little while. They will come back and revisit ahead of the debt ceiling debate. I think for now there will be a cooling-off period."
S&P stock futures inched up 0.2 percent, unchanged from earlier price action after the cash index fell 0.6 percent on Monday, while U.S. Treasury futures slipped 4 ticks.
European shares were expected to open flat to slightly higher, with London's FTSE 100 seen opening up as much as 0.1 percent and Frankfurt's DAX up as much as 0.3 percent, according to financial bookmakers.
About a million U.S. federal employees could face unpaid furloughs, but a shutdown would be unlikely to affect the United States' s sovereign credit rating.
Todd Elmer, Citigroup's currency strategist, said the partial shutdown will delay the release of the nonfarm payrolls data this Friday, a key indicator which the Federal Reserve will consider as it decides on the timing of scaling back its massive stimulus.
"The bigger issue this raises is that the employment data has the potential to be unusually muddled in the near term, which means divining the implications for Fed policy may be more difficult," Singapore-based Elmer wrote in a note.
"All else being equal, additional uncertainty on the quality of the data probably argues for the Fed to be more cautious, in addition to potential policymaker concern on increased drag from fiscal conditions."
But ING's Condon said the markets would find ways to gauge the U.S. labour market even if the jobs report were to be delayed.
"They will be looking at other indicators. The Challengers, the ADP numbers will give a sense of what's happening in the labour market ... I am sort of hard pressed to see this turn into something major. We've seen it before. Both sides will act in time to avert a catastrophic outcome."
The dollar was down 0.1 percent against a basket of currencies, not too far from a 7-1/2 month low touched on Monday.
JAPAN SALES TAX
The greenback was steady at 98.12 yen after rising to as much as 98.48 yen immediately after Japan's Prime Minister Shinzo Abe said he had decided to raise the sales tax as planned from April 1 next year to 8 percent from the current 5 percent to reform public finances.
Japan's Nikkei share average rose 0.4 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4 percent, pulling away from a two-week low after it slid 1.5 percent in the previous session. Regional trading activity was expected to be light with China and Hong Kong closed for National Day holiday.
China's manufacturing growth edged up only slightly last month with the official Purchasing Managers' Index rising to 51.1 from August's 51.0, but below expectations and adding to worries that its economy recovery has foundered.
In the commodity markets, gold ticked up 0.1 percent to about $1,328.6 an ounce after gaining 7.6 percent in July-September, reversing three straight quarters of decline.
Brent crude dipped 0.5 percent to around $107.8 a barrel after gaining 6 percent in the third quarter, also ending a three-quarter losing streak.