GLOBAL MARKETS-Shares stumble, dollar wobbly as U.S. debt worries grow

Reuters

* Asian shares dip as U.S. budget deadlock continues

* Yellen nomination as Fed chief provide limited relief

* Some investors taking precautionary steps against U.S.default

* U.S. bill yield soars to 5-yr high on default concerns

* European shares slipping further

By Hideyuki Sano

TOKYO, Oct 9 (Reuters) - Asian shares sagged and the dollarlanguished close to an 8-month low on Wednesday as the U.S.budget deadlock dragged on, further chipping away at investors'confidence that a deal will be reached before a mid-Octoberdeadline to avoid an historic debt default.

The dour mood is seen extending to Europe, where Britain'sFTSE is seen slipping 0.3 percent from Tuesday'sthree-month low. Financial bookmakers also see Germany's DAX shedding 0.3 percent and French shares 0.2 percent.

While markets expect U.S. politicians will eventually strikea deal, they are getting nervous as the deadline nears withoutany tangible progress between Democrats and Republicans.

The MSCI's broadest index of Asia-Pacific shares outsideJapan dipped 0.3 percent.

Japanese shares bucked the trend, stepping back fromfive-week lows, though the rebound came only after asteep fall of nearly three percent so far this month, a biggerdrop than the S&P 500.

"Everyone had been thinking that U.S. politicians willbecome grown-ups in the end. But some people are starting tothink they look too childish to become grown-ups in time," saidTohru Yamamoto, chief fixed income strategist at DaiwaSecurities.

President Barack Obama said he would be willing to negotiateonly after Republicans agree to re-open the government and raisethe debt limit with no conditions. Republican House Speaker JohnBoehner said he was disappointed by the president's approach.

"At the moment there is no sign of compromise, although themarket expects Republicans will eventually agree to raising thedebt ceiling," said a proprietary trader at a Japanese bank.

Wall Street shares dropped to one-month low on Tuesday, withS&P 500 index falling 1.2 percent, risking a breakbelow a key trendline support from 2012.

The CBOE Volatility Index, a measure of investoranxiety, rose nearly five percent to close at its highest sinceJune 20.

The budget impasse overshadowed news Obama will nominateFederal Reserve Vice Chairwoman Janet Yellen as the next head ofthe U.S. central bank.

U.S. stock futures gained about 0.3 percent asYellen is seen as a proponent of dovish policy.

"I wouldn't expect this rally in risk to be too sustainablegiven much bigger issues at play including the U.S. governmentshutdown. The Oct. 17 initial deadline looms large as well,"said Sue Trinh, senior currency strategist at RBC in Hong Kong.

U.S. Treasury Secretary Jack Lew has said the Treasury willbe low on funds by that date, but some market players suspect itcould manage for several days beyond that, which could prolongthe deadlock further.

The government shutdown is already disrupting U.S. dataflows, helping to put talk of tapering in the Fed's stimuluscompletely off the table for now.

After September's surprise decision to delay tapering, manyeconomists now think the Fed will not move until Bernanke hasleft office.

Still, the minutes of the Fed's policy meeting on Sept 17-18due at 1800 GMT will attract attention given many investors arestill perplexed as to exactly why the Fed did not scale back itsstimulus despite widespread expectations to do so.

Some investors are starting to take precautions to protect against the possibility of a U.S. default by shunning U.S. debtmaturing in late October and early November.

The yield on four-week U.S. government bills hit a 5-yearhigh above 0.3 percent of on Tuesday.

Against a basket of major currencies, the dollar was at80.04, close to an eight-month low hit last week. .

Although the fiscal standoff has hurt sentiment on thedollar, ironically, the greenback drew some support from it oflate as well, as foreign banks bought the U.S. currency just incase a deal is not reached and liquidity dries up.

The dollar rose to 97.21 yen after having hit atwo-month low of 96.55 yen on Tuesday. The euro traded at$1.3568, below an eight-month peak of $1.36465 hit lastweek.

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