* Optimism on U.S. debt talks spurs shares, dollar higher
* Short-dated money market rates reflect caution over deal
* Wall St set for mixed start as Citigroup results weigh
* Gold sheds 1.2 pct to 3-mth low, Iran talks pressure oil
By Richard Hubbard
LONDON, Oct 15 (Reuters) - Signs of a deal to avert aneconomically damaging U.S. debt default boosted world equitiesand the dollar on Tuesday, though firm short-term interest rateshighlighted concerns that the problem may just be postponed.
Hopes of a deal rose after U.S. Senate Majority Leader HarryReid, a Democrat, and his Republican counterpart, MitchMcConnell, ended a day of talks on Monday, with Reid saying theyhad made "tremendous progress".
While markets remain wary over the eventual outcome, thesigns of a last-minute compromise were enough to lift Europe'sblue chip index, the Euro STOXX 50 to a 2-1/2-yearhigh and sent shares in Asia to five-monthhighs.
U.S. stock index futures signaled a mixed start on WallStreet with a weak earnings report from Citigroup likelyto pressure the broad S&P 500 index which is lying just below arecord high. [ .N]
"The consensus is bullish, everyone believes that a dealwill be reached," said Guillaume Dumans, co-head of researchfirm 2Bremans.
The gains around the world lifted MSCI's world equity index, which tracks shares in 45 countries, by 0.15percent, leaving it just three points away from a five-year highhit in September prior to the crisis in Washington.
However, the reaction in the U.S. Treasury bill market wasmore muted as sources close to the negotiations revealed thatthe plans under discussion may only free the government toborrow more money to fund itself until mid-February 2014.
U.S. Treasury one-month bill yields were yielding around 20basis points, down 5.5 bps on the day but well up from 2.5 bpson Sept. 30 just before the fiscal deadlock inWashington forced the government to begin a partial shutdown.
"There seems to be some progress being made but the solutionthat is being proposed is far from perfect. It's short-term,it's just pushing the problem further along for a few months,"Philip Tyson, strategist at ICAP, said.
The dollar shared some of the optimism over the prospects ofa last-minute deal emerging this week, gaining 0.5 percent tohit a one-month high against a basket of major currencies.
Against the safe-haven Swiss franc, the dollar was also at aone-month peak, at 0.9160 francs, but it was littlechanged versus the yen, another refuge in times of uncertainty,at 98.50 yen.
The gains in the dollar may be limited as the governmentshutdown is expected to have hurt the U.S. economic recovery,and has convinced many that the Federal Reserve will have toextend its monetary stimulus into next year.
"If we get some kind of temporary resolution in the U.S. itwill still have a small positive short-term impact on thedollar. But in the medium term this is clearly dollar-negative,"said Richard Falkenhall, currency strategist at SEB.
Elsewhere in the currency market, the Australian dollarjumped to a four-month high when minutes of the central bank'sOct. 1 meeting revealed it was prepared to cut interest ratesfurther though it was in no hurry to act.
In Europe an unexpected rise in German analyst and investorsentiment lifted the outlook for the region's largest economy.
The influential ZEW Institute's monthly poll of economicsentiment rose to its highest level since April 2010 and beat aReuters poll forecast for no change.
The ZEW data had scant impact on the euro, however. It wasdown 0.5 percent at $1.35, near the bottom of its recentrange trading band of $1.35 to $1.36.
German 10-year government bond yields were at their highestlevels in three weeks, up 3 basis points at 1.89 percent, though most of the move came before the ZEW data.
A separate report on price pressures in Britain showedinflation was higher than expected in September and house priceshad risen sharply, adding to doubts over how long the centralbank can hold down interest rates.
Gold, whose safe-haven appeal is usually burnished duringtimes of uncertainty, fell to a fresh three-month low. It shed0.8 percent to $1,262 an ounce.
Oil prices gained some support from the encouraging U.S.budget negotiations but were under pressure from talks in Genevaover Iran's nuclear programme that might eventually lead to apick-up in Iranian oil shipments.
Brent crude futures were trading down 83 cents at$110.26 a barrel at 1215 GMT, after ending lower in the twoprevious sessions.