Major global stock markets fell sharply on Wednesday on concerns about continued impasse in Washington over U.S. debt, while the U.S. dollar rebounded following a sell-off this week. Gold fell after earlier hitting record highs for the sixth time in two weeks. The metal is up 8 percent in July as debt troubles in both the United States and euro zone has fueled safe-haven buying.
A Republican plan to cut the U.S. deficit faced delay and stiff opposition, raising the risk of default and a ratings downgrade as the clock ticks toward a deadline less than a week away. The cost of insuring U.S. government debt against a default within a year rose to a record high.
Wall Street stocks skidded as troubling signs from U.S. corporations and weaker-than-expected U.S. durable goods data further discouraged investors already nervous about faltering debt talks in Washington.
"We haven't been committing new capital. We've been holding off on making any purchases over the last few days," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago. "If you multiply us by the other 10,000 money managers, you get a sense of why the market is getting a little soft."
The Dow Jones industrial average was down 95.25 points, or 0.76 percent, at 12,406.05. The Standard & Poor's 500 Index fell 16.08 points, or 1.21 percent, at 1,315.86. The Nasdaq Composite Index lost 49.30 points, or 1.74 percent, at 2,790.66.
World shares as measured by MSCI fell 1.3 percent. The FTSEurofirst 300 ended down 1.1 percent. European shares have been hit by persistent fears of contagion in the euro zone debt crisis.
Japan's Nikkei .N225 closed down half a percent.
Even if a plan avoids a U.S. default, if it flinches from hefty deficit cuts, this could result in a downgrade of the government's AAA rating and raise borrowing costs, dealing a severe blow to the economic recovery.
Analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.
DOLLAR REBOUND
The U.S. dollar fell early to an all-time low against the Swiss franc at 0.7996 CHF=EBS. It also hit a four-month trough of 77.57 yen JPY=EBS, approaching a record low of 76.25 set in March, raising concerns Japanese authorities may intervene to stem the yen's strength.
But the dollar then rebounded and rallied against the euro as investors booked profits on bets against the greenback.
The dollar remained vulnerable, however, as most market participants believed the deficit reduction proposals fall short of the required cuts necessary to avert a downgrade.
"The dollar sell-off has come pretty far, pretty fast. I wouldn't make huge amounts of ... the fact that it's taking a bit of a pause here," said Jonathan Lewis, founding principal of the New York-based Samson Capital Advisers, with $7 billion in assets under management.
"It is possible that the dollar is getting some sort of safe-haven bid, even though that's a bit of an oxymoron for the dollar. Old habits die hard and equity markets are selling off and so the world is trying to connect the dots here."
The euro, which often weakens on rising risk aversion, last traded at $1.4350 EUR=, down 1.1 percent. Against a basket of currencies, the dollar index fell as low as 73.421, a 2-1/2 month low, before bouncing back to last trade at 74.147.
Spot gold XAU= earlier rose as high as $1,628 an ounce before easing to near $1,616. Bullion could pull back sharply if a deal to cut the long-term U.S. deficit dampens market fears, analysts said.
U.S. crude CLc1 fell $1.53 to $98.06 a barrel as investors fled assets perceived to be dependent on growth. Prices were also pressured by an industry report showing U.S. crude stocks rose unexpectedly.
In U.S. government debt trading, the benchmark 10-year Treasury note US10YT=RR lost 7/32 in price for a yield of 2.98 percent. Prices also weakened as traders prepared for $35 billion of fresh five-year note supply.
