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

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

* 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 on Monday, sending European shares to a four-month low and pushing the dollar and oil down.

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

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

"Until we get some sort of resolution, a lot of investors are standing back, keeping their money off the table just in case the unthinkable happens," said Richard Hunter, head of equities at Hargreaves Lansdown.

European stocks fell 0.9 percent by mid-morning to touch their lowest level in a month following a weaker session in Asia which saw MSCI's broadest index of Asia-Pacific shares outside 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 CAC 40 was also 1.1 percent lower.

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

Wednesday's release of minutes from last month's Federal Reserve policy meeting, which could reveal more about why the central 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 line from both sides heightened the prospect that political manoeuvering over the budget will get caught up with the crucial issue 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 packaged with some sort of agreement on the debt ceiling, and that's playing chicken," said David Lebovitz, global market strategist at J.P. Morgan Asset Management said.

Nerves were not helped when Republican House Speaker John Boehner 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 and reckless to raise the possibility of a default.

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

The CBOE Volatility Index, known as the market's fear gauge, rose to 16.73 at the end of last week from 13.12 on September 20, a sign of increased worry, although this level is still considered low.

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

The dollar shed 0.5 percent to 96.92 yen with the euro gaining 0.1 percent to $1.3575, close to an eight-month high.

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

Despite the risk of a possible default, U.S. 10-year debt prices also gained, as the impact of the partial government shutdown on growth pushes back expectations on when the Fed will being 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 of reading too much into the U.S. impasse.

"The general view on it is that a solution will be found and we will probably see a rebound in markets ... and that is not going to be a very favourable environment for gold," Credit Suisse analyst Karim Cherif said.

Gold has lost some of its safe-haven appeal since political tensions 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 resumption of 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 a barrel, after ending last week up 0.9 percent.