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

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

* Wall Street stocks lower, following equities elsewhere

* Dollar weakens against yen, near 8-month low against euro

* Oil falls on concerns U.S. government shutdown will curb demand

By Herbert Lash

NEW YORK, Oct 7 (Reuters) - The dollar and global equity markets fell on Monday as the impasse over the week-old U.S. government shutdown got entangled in negotiations to raise Washington's borrowing limit or risk default on U.S. sovereign debt.

A lack of progress by U.S. lawmakers in budget and debt ceiling talks rattled investors, pulling stocks on Wall Street down and sending European shares to a four-month low.

Republican House of Representatives Speaker John Boehner vowed not to raise the U.S. debt ceiling without a "serious conversation" about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.

The dollar fell, hovering near an eight-month low against a basket of major trading currencies, and crude oil prices slipped as the government shutdown and looming fight over the debt ceiling clouded the economic outlook.

"Last week investors were hopeful that the government shutdown would be short-lived in nature," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

"Now that it's entering its second week, investors are growing a bit more edgy and that's being played out in weaker world stocks and the dollar staying on the defensive."

MSCI's all-country world stock index, which tracks equity performance in 45 countries, was down 0.49 percent.

European stocks drifted lower in thin trading as the U.S. budget impasse dragged on, pushing the FTSEurofirst 300 index of top regional shares down 0.21 percent to 1,241.09, its lowest close in four weeks.

On Wall Street, the Dow Jones industrial average was down 67.82 points, or 0.45 percent, at 15,004.76. The Standard & Poor's 500 Index was down 5.48 points, or 0.32 percent, at 1,685.02. The Nasdaq Composite Index was down 16.85 points, or 0.44 percent, at 3,790.90.

The benchmark S&P 500 has fallen for two weeks and is down nearly 3 percent from its all-time closing high of 1,725.52, reached on Sept. 18, over concerns about the budget impasse's impact on the economy.

The financial and energy sectors were among the worst performers, down 0.9 percent and 0.5 percent, respectively.

"Thus far, investors have felt assured that they are watching the re-run of an old cliffhanger movie, but the rising frequency of the replay has instilled a sense of deja-vu," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

Investors flocked to perceived safe havens like the yen and Swiss franc, driving the dollar to it weakest since mid-August against the Japanese currency.

The dollar index fell 0.22 percent to 79.941, after earlier trading at a low of 79.914, not far from an eight-month low of 79.627 hit on Thursday.

The dollar fell 0.4 percent to 0.9035 Swiss franc. The euro rose 0.11 percent to $1.3572. Against the yen , the dollar fell 0.57 percent to 96.90 yen.

Brent crude fell more than 1 percent to below $108 a barrel at one point as oil production resumed in the Gulf of Mexico after a tropical storm. Concerns over the U.S. government shutdown and its economic impact also weighed on prices.

Brent subsequently pared some losses, but was still off 21 cents at $109.25 a barrel. The benchmark ended higher last week, snapping a three-week losing run.

U.S. crude fell $1.09 to $102.75 a barrel.

U.S. Treasuries prices gained as lawmakers in Washington showed no progress toward ending the partial government shutdown.

The benchmark 10-year U.S. Treasury note was up 4/32 in price to yield 2.6302 percent.

Low-risk euro zone bonds pushed higher, with safe-haven German Bunds outpaced the rest of the euro zone market. Bund futures rose 35 ticks to settle at 140.31.