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European shares fall as U.S. debt impasse unnerves investors

LONDON, Oct 7 (Reuters) - European stocks fell on Monday as a lack of progress in resolving U.S. government disputes over the federal budget and debt ceiling dented confidence in the world's largest economy.

The FTSEurofirst 300 index of pan-European shares fell 0.5 percent to 1,237.38 points while the euro zone Euro STOXX 50 shed 0.7 percent to 2,907.28 points.

U.S. Democrats and Republicans came no closer on Sunday to a budget agreement that would end a government shutdown, let alone reaching a deal on the U.S. borrowing limit by Oct. 17 to avoid a default.

Many market players still expected a deal to be reached but said volatility was likely in the short term. Volatility on the Euro STOXX 50 ended last week just shy of 20.

"We're going to wobble our way down until about Thursday and then there's going to be a solution and there will be a melt-up," or rise in market prices, said Justin Haque, a broker at Hobart Capital Markets.

He expected the Euro STOXX 50 to fall by between 1.5 percent and 2.5 percent before an agreement is reached.

The Euro STOXX 50 is less than 1 percent away from a two-year high hit in September but has flat-lined over the past two weeks as the deadlock in the United States and a political crisis in Italy curbed appetite for stocks.