* U.S. gov't remains shut down, debt ceiling deadline looms
* U.S. 1-month T-bill rates highest since November
* Wall Street slumps, dollar hits eight-month low
By Wanfeng Zhou
NEW YORK, Oct 3 (Reuters) - Stock markets worldwide lostground on Thursday while the dollar dropped to an eight-monthlow as worries grew the budget standoff in Washington wouldmerge with a looming more complex fight over the U.S. borrowinglimit.
Major U.S. stock indexes earlier fell more than 1 percent asa partial U.S. government shutdown entered a third day and afterPresident Barack Obama reiterated that he would not meetRepublican demands in exchange for operating the government.
Analysts expect investor patience to run out if the shutdownlasts more than about a week as the debt ceiling deadlineapproaches. U.S. Treasury Secretary Jack Lew hassaid the United States will exhaust its $16.7 trillion borrowingauthority no later than Oct. 17.
Failure to raise the debt limit could damage not only theUnited States but the rest of the global economy, InternationalMonetary Fund chief Christine Lagarde said. Concerns about aU.S. default has seen the cost to insure Treasuries soaring,while U.S. one-month Treasury bill rates hit their highest levelsince November.
But stocks and Treasury yields bounced off the day's lowsafter a report from The New York Times said House ofRepresentatives Speaker John Boehner was determined to prevent agovernment default.
A spokesman for House Speaker Boehner said that the topRepublican has always said the country will not default on itsdebt, but that there are not enough votes in the chamber to passa debt limit hike without provisions.
"What's happened in Washington? Nothing. When people areuncertain about what's going to happen, they sell first and askquestions later," said Michael James, managing director ofequity trading at Wedbush Securities in Los Angeles.
"I think the feeling on Tuesday was, 'OK, the government'sshut down, but they're going to do something in a day or two.'Now we're in day three and people are getting both a littleconcerned and annoyed."
MSCI's world equity index, which tracksshares in 45 countries, fell 0.4 percent to 382.64. It has lostmore than 2 percent since its recent high on Sept. 19.
The Dow Jones industrial average dropped 133.77points, or 0.88 percent, to 14,999.37. The Standard & Poor's 500Index fell 15.24 points, or 0.90 percent, to 1,678.63.The Nasdaq Composite Index lost 43.88 points, or 1.15percent, to 3,771.14.
Market volatility could increase if the deadlock continuesas concerns about the economic impact increase. Goldman Sachsestimated a short-term shutdown would slow U.S. economic growthby about 0.2 percentage point, while a weeks-long disruptioncould weigh more heavily - 0.4 percentage point - as furloughedworkers scale back personal spending.
The dollar fell 0.2 percent against a basket of currencies, having touched an eight-month low of 79.730 as theshutdown diminishes the chances of the Federal Reserve willreduce its monetary stimulus this year.
The euro firmed 0.4 percent to $1.3625, after hittingits highest level in eight months, helped by solid euro zonedata. Growth in services companies, comprising the vast bulk ofthe euro zone's private sector, increased in September at thefastest pace since June 2011 while retail sales rose much morethan expected in August.
European shares dropped 0.4 percent to close at1,242.18 points.
U.S. DEFAULT RISK
Treasury debt prices rose and yields eased as investorsbought U.S. government debt, still seen as the most viablesafe-haven investment. U.S. benchmark 10-year Treasury notes were up 3/32 in price with a yield 2.608 percent.
The cost to insure U.S. government debt, however, has soaredin the credit default swaps market.
Investors would pay about 46,000 euros to insure 10 millioneuros worth of Treasuries for a year on Thursday, according toMarkit. This was the highest premium on one-year U.S. sovereigndebt since July 2011 during the first debt ceiling showdownbetween U.S. President Barack Obama and top Republicanlawmakers.
Interest rates on Treasury bills that will come due betweenthe debt ceiling deadline and the end of October also rose ondefault worries. The rate on the T-bill issue due on Oct. 31 touched 0.17 percent, the highest level sinceNovember. This compared with the 0.03 percent on the T-bill duethe following week.
U.S. data earlier showed the number of Americans filing newclaims for jobless benefits edged up last week, while growth inthe U.S. services sector cooled last month.
The Labor Department on Thursday said the government'semployment report for September will not be released asscheduled on Friday due to the shutdown and a new release datehad not yet been set.
Spot gold traded little changed $1,317 an ounce as investors booked profits after the previous session'sgains. The yellow metal rose 2.2 percent on Wednesday, postingthe biggest daily gain in two weeks.
Brent crude gave up early gains sparked by strong data fromChina. Activity in China's services sector expanded at thefastest pace in six months in September as demand grew,cementing a modest pick-up in the world's second-largesteconomy.
Brent crude was last down 25 cents to $108.94 abarrel. U.S. oil fell 68 cents to $103.45 a barrel.
- President Barack Obama
- government shutdown