* Dollar hits 1-mth low to yen on U.S. impasse
* Surprisingly weak private jobs report extends losses
* Short-term U.S. debt default insurance costs rise
* Euro at 8-month high as ECB holds rates, Italian crisiseases
* Oil edges above $108 barrel, gold recovers
By Richard Hubbard
LONDON, Oct 2 (Reuters) - A surprisingly weak U.S. privatesector jobs report sapped the dollar and world shares onWednesday, adding to concerns about the economic impact of thebudget standoff in Washington.
Private employers in America added 166,000 new jobs inSeptember, extending a run of modest labour market gains that isseen keeping the Federal Reserve reluctant to scale back itsefforts to stimulate the economy.
"If the numbers had come up really, really strong, perhapspeople would overlook the problems in Washington. But with thenumbers coming in slightly below expectations, it renews concernthat the recovery could start to peter out," said Rick Meckler,president of hedge fund LibertyView Capital Management LLC.
Financial markets had been taking a sanguine view of thepartial Federal Government shutdown, expecting a resolutionbefore any serious economic impact was felt, with many globalstock indexes kicking off the new quarter with gains on Tuesday.
But there is growing concern that the longer the shutdowncontinues, the bigger its impact and the more likely it is thatlawmakers will fail to reach a deal on the more crucial issue ofraising the public debt ceiling to prevent a default.
"We do fear that as this discussion drags on, volatility inthe market will continue to increase," said Patrick Moonen,senior equity strategist at ING Investment Management.
U.S. stock index futures showed Wall Street was setto open 0.7 percent lower. Global equities, as measured byMSCI's world equity index, were down just 0.15percent by 1230 GMT having started the new month with a 0.9percent gain on Tuesday.
The dollar, which had fallen on Tuesday as the shutdownbegan, fell another 0.5 percent to its lowest since late Augustagainst the yen.
The cost of insuring U.S. government bonds against defaultfor the next year also rose, gaining five basis points to raisethe cost of protecting $10 million of debt to $35,000 - thehighest since Aug. 31 and above the rate for 5-year insurance.
Usually it costs more to buy longer-term default insuranceso the current level is considered a classic sign of creditstress, reflecting the concerns over whether the United Stateswill be able to raise the debt limit in coming weeks.
The euro was drawing support from events in Washingtonand to some extent from the European Central Bank's decision tokeep its main refinancing and deposit rates on hold as had beenwidely expected.
ECB President Mario Draghi, at a subsequent news conference,also kept alive the prospect of further support for the region'seconomy with looser policies, and said he was keeping a closeeye on rising short-term interest rates.
Draghi's lack of concern about the euro exchange rateagainst the dollar also sent the shared currency to an 8-monthhigh of $1.3590.
A confidence vote for Italian Prime Minister Enrico Letta'sgovernment, ending fears that the euro zone's third largesteconomy would be forced into fresh elections, added to thecurrency's appeal.
Italian shares and bonds both rose as it become clear former prime minister Silvio Berlusconi would drop his attempts tobring down the government, sending Milan's FTSE MIB share index up as much as 1.8 percent
The main barometer of market concern, the premium investorsdemand to hold Italian 10-year government bonds over AAA-ratedGerman Bunds, fell to 260 points from 300 basis points at thestart of the week as 10-year bond yields eased 10 basis pointsto 4.37 percent.
In commodity markets, gold edged up from two-monthlows below $1,300 an ounce hit when a massive sell order stokedfears of further liquidation. Gold also took some support fromthe weaker dollar.
Copper futures though dipped 0.4 percent afterposting their biggest quarterly gain since March 2012 thanks toa steadier outlook for global growth.
Oil prices recovered from early weakness with the Novembercontract up 29 cents at $108.25 per barrel.
- USA News