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-GLOBAL MARKETS-U.S. tensions keep dollar near 8-mth low, stocks sag

* Euro holds near 8-month high vs dollar, eyes 2013 peak

* European shares lower, world shares head for 2nd week in


* Nikkei hits a 4-week low, BOJ more upbeat on capex

* Bond markets remain largely relaxed about U.S. tensions

By Marc Jones

LONDON, Oct 4 (Reuters) - The government shutdown and

looming debt deadline in the United States kept the dollar

pinned at an eight-month low on Friday and drove world shares

towards a second week of losses.

With no clear progress in Washington, financial markets were

facing up to the possibility the deadlock could extend to Oct.

17, when the government will effectively run out of cash.

European shares opened weaker for a third day, down

0.3 percent in early trading after Asian markets were led lower

by a near 1 percent drop on Tokyo's Nikkei.

World stocks overall were down 0.15 percent

on the day and head for a second weekly loss in a row of 0.7

percent, but analysts saw that as of minor significance

considering their recent strength.

Instead, focus was mainly on the ailing dollar, which

hovered at an eight-month low against a basket of major

currencies following a 3.5 percent drop during the last three

weeks of political wrangling.

House of Representatives Speaker John Boehner was quoted on

Thursday as saying Washington will make sure it does not default

on its debt, though compromises may be needed.

Hitting the debt ceiling could lead to an unprecedented U.S.

default, an outcome the market assumes is unthinkable.

"By far the biggest risk is October 17. If the debt ceiling

is not raised beyond $17.6 trillion words like default are going

to start rearing their head," said Neil Williams, chief

economist at fund manager Hermes.

"Is the world's biggest economy really going to default on

its debt when the wheels of the Fed's printing presses are still

turning? I highly doubt it."

With the dollar firmly on the back foot, the euro held at

$1.3622, within striking distance of its 2013 peak of

$1.3711 following a week of largely encouraging data.

The U.S. shutdown delayed the closely-watched nonfarm

payrolls data, normally out on Friday and a key factor in

Federal Reserve deliberations on when to scale back its

stimulus. The postponement had no noticeable market impact.

Several Fed officials are due to speak later in the day

after two senior policymakers warned on Thursday of dire

consequences if the country defaulted on its debt. One said the

Fed's monetary policy was being kept ultra-easy to help offset

the harm caused by the wrangling.

In Asian trading, Tokyo's Nikkei ended down 0.94 percent

taking its cue from the U.S. S&P 500, which suffered its

ninth loss in 11 sessions overnight, after the Bank of Japan

maintained its policy stance and pointed to the country's slowly

improving economy.


Debt markets have remained largely relaxed about the U.S.

tensions, and yields on benchmark U.S. Treasuries

and German Bunds were slightly higher in early

trading after a largely steady week.

Italian bonds extending this week's relief rally after Prime

Minister Enrico Letta's government won a confidence vote in

parliament. Italian shares in Milan also outperformed,

up 0.8 percent versus falls of 0.2 percent in London and


In commodity markets, trading remained choppy. Brent crude

edged up 0.2 percent to around $109.27 a barrel,

reversing a 0.2 percent decline overnight after slower U.S.

service sector growth in September compounded worries about

demand for raw materials.

Gold was steady at $1,316.51 an ounce while copper

prices stabilised at $7,202.25 a tonne after tumbling

1.3 percent on Thursday.