* World shares drop for 3rd day on U.S. deadlock
* Yellen nomination as Fed chief provides limited relief
* Dollar makes gains on yen and Swiss franc
* Brent oil dips below $110, gold eases
By Richard Hubbard
LONDON, Oct 9 (Reuters) - Janet Yellen's expected nominationto head the Federal Reserve boosted the dollar and was set togive Wall Street an early lift on Wednesday as it endeduncertainty, though the U.S. budget deadlock continued to weighon markets.
A White House official said U.S. President Barack Obamawould nominate Yellen, currently deputy chief at the Fed, tohead the central bank later in the day.
She is seen as largely sticking to policies of herpredecessor Ben Bernanke, including maintaining the bank'scommitment to stimulus to keep economic recovery on track.
"In the face of improving (economic) figures but loominguncertainty, markets can expect Yellen to continue with acautious hand on the tiller," said Anne Richards, chiefinvestment officer at Aberdeen Asset Management.
However, many market participants expect the positive impactof the nomination to be short-lived given the lack of progressto end political wrangling in Washington that could lead to aU.S. debt default next week.
Those worries sent European shares to a freshone-month low on Wednesday, although the Yellen decisionattracted some buyers expecting the U.S. central bank to movecarefully in unwinding its equity-friendly stimulus.
"It's the Yellen effect that has brought financial marketstabilisation," said Oliver Roth, head trader at Close BrothersSeydler.
Earlier the MSCI index of Asia-Pacific shares outside Japan had dipped on the budget deadlock, losing 0.3percent, and MSCI's world index was still down0.1 percent, its lowest level since Sept. 9.
U.S. stock index futures pointed to a slight rebound in theStandard & Poor's 500 index, which shed 1.2 percent onTuesday for its biggest one-day drop in nearly six weeks.
Investors remain nervous over the implications of thedeadlock in Washington as shown by a rise in the impliedvolatility on euro zone equities, seen as a crude barometer forrisk aversion, which has jumped 30 percent in nearly two weeksto 21.1.
It was only at two-thirds of the level seen in the summer of2011 during the last big crisis over the debt ceiling.
The main U.S. fear gauge, the CBOE Volatility Index,stands at its highest level since June 20 having risen 21.5percent in the past two days on heavy volumes.
Yellen's dovish stance on policy meant her appointment hadpreviously been seen as a net negative for the U.S. currency,but the budget calculus appears to have changed that for themoment.
"In the past when Yellen's nomination became more likely, wesaw dollar weakness and suddenly we are seeing dollar strength,"said Ulrich Leuchtmann, head of FX research at Commerzbank.
"My interpretation is that we are at the moment in the phasewhere we might get into very deep trouble with the U.S. budgetcrisis and if that is the case, it would be good to have a Fedwhich would be very reactive and this is good for the dollar."
As a result the dollar gained about 0.5 percent to 97.30 yen, moving away from a two-month low of 96.55 touched onTuesday. It was also up 0.5 percent against the safer Swissfranc at 0.9084 francs.
Investors in short-term money market were still takingprecautions against the possibility of a U.S. default byshunning U.S. debt maturing in late October and early November.The yield on four-week U.S. Treasury bills stood at around 0.25percent, just below Tuesday's five-year high of 0.3 percent.
Yellen's appointment, the disruption to the U.S. economicdata flow from the government shutdown and the unknown impact ofthe budget impasse on the economy has also convinced many thatthe Fed will keep pumping cash into the economy into next year.
Minutes of the Fed's September meeting, due at 1800 GMT, mayoffer the market some clue as to the outlook though most will bescrutinising the report for the reasons behind the centralbank's shock decision not to start scaling back its stimulus.
In the commodity markets gold was stuck in a tight range bythe U.S. budget impasse, while oil prices eased below $110 abarrel on concerns that the impact on investorconfidence could hurt demand for oil.
Spot gold eased 0.7 percent to $1,310 an ounce wellwithin its recent range of between $1,300 and $1,330 an ounce.
"The support for gold will strengthen as we get nearer to thecritical (debt ceiling deadline) next week," said Song Seng Wun,an economist at CIMB.
- Janet Yellen