GLOBAL MARKETS-Stocks, dollar slide as U.S. impasse frays nerves

Reuters

* Lack of progress in U.S. debt, budget talks shakesconfidence

* European shares hit 1-month low, Asian stocks weaken

* Dollar weakens against yen, near 8-mth low against euro

* Oil sheds $1.25 a barrel, gold prices firm

By Richard Hubbard

LONDON, Oct 7 (Reuters) - A lack of progress by U.S.lawmakers in budget and debt ceiling talks rattled investors onMonday, sending European shares to a four-month low and pushingthe dollar and oil down.

U.S. stock index futures suggested Wall Street would alsohead lower later in the day after neither side in Congressoffered any signs of a compromise over the weekend.

Trading remains relatively calm, suggesting confidence thata deal to end a partial government shutdown and raise the U.S.borrowing limit will emerge. But with only 10 days left to avoida debt default, some investors are heading for the exit and fewlook to be making fresh bets.

"Until we get some sort of resolution, a lot of investorsare standing back, keeping their money off the table just incase the unthinkable happens," said Richard Hunter, head ofequities at Hargreaves Lansdown.

European stocks fell 0.9 percent by mid-morning totouch their lowest level in a month following a weaker sessionin Asia which saw MSCI's broadest index of Asia-Pacific sharesoutside Japan drop 0.6 percent.

Britain's FTSE 100 index was down 0.9 percent,Germany's DAX index fell 1.1 percent and France's CAC40 was also 1.1 percent lower.

Global shares as tracked by MSCI shed 0.4percent, extending a two-week run of losses that has knocked theworld index from a five-year highs hit on hopes of a worldwideeconomic recovery fueled by loose monetary policies.

Wednesday's release of minutes from last month's FederalReserve policy meeting, which could reveal more about why thecentral bank decided not to scale back its monetary stimulus,also weighed on sentiment.

'PLAYING CHICKEN'

Strategists said all eyes were on Congress as the hard linefrom both sides heightened the prospect that politicalmanoeuvering over the budget will get caught up with the crucialissue of raising the debt ceiling, delaying a deal.

"Every day we don't see a funding deal done in the U.S.brings us one step closer to that funding deal being packagedwith some sort of agreement on the debt ceiling, and that'splaying chicken," said David Lebovitz, global market strategistat J.P. Morgan Asset Management said.

Nerves were not helped when Republican House Speaker JohnBoehner on Sunday said the debt ceiling would not rise without a"serious conversation" about what was driving the debt.Democrats stuck to their stance that it was irresponsible andreckless to raise the possibility of a default.

Despite the deadlock, share market volatility gauges have sofar been held in check though they have begun to edge higher.

The CBOE Volatility Index, known as the market's feargauge, rose to 16.73 at the end of last week from 13.12 onSeptember 20, a sign of increased worry, although this level isstill considered low.

The standoff pushed the dollar down 0.15 percent against abasket of major currencies to 80.0, leaving it not farfrom an eight-month low of 79.627 hit last week.

The dollar shed 0.5 percent to 96.92 yen with theeuro gaining 0.1 percent to $1.3575, close to aneight-month high.

Core government bonds, a haven in times of uncertainty,gained, with 10-year German yields dropping 2.1basis points to 1.81 percent.

Despite the risk of a possible default, U.S. 10-year debtprices also gained, as the impact of the partial governmentshutdown on growth pushes back expectations on when the Fed willbeing tapering back its monetary stimulus.

GOLD SOLID

The weaker dollar helped gold edge up 0.1 percent to around$1,312 an ounce, suggesting traders remained wary ofreading too much into the U.S. impasse.

"The general view on it is that a solution will be found andwe will probably see a rebound in markets ... and that is notgoing to be a very favourable environment for gold," CreditSuisse analyst Karim Cherif said.

Gold has lost some of its safe-haven appeal since politicaltensions in Syria eased and traders said the partial U.S.shutdown did not spark a flurry of safe-haven bids.

A softer tone in oil prices was supported by the resumptionof production in the Gulf of Mexico after a storm.

Brent crude shed $1.25 a barrel to trade around$108.20, while U.S. crude was down $1.26 to $102.58 abarrel, after ending last week up 0.9 percent.

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