GLOBAL MARKETS-Shares slip, bonds gain on US debt ceiling fears
* U.S. debt ceiling gridlock weighs on sentiment
* MSCI world index falls from near 18-month highs
* Yen up after minister warns on excessive weakness
By Herbert Lash
NEW YORK, Jan 15 (Reuters) - World equity markets slid and safe-haven U.S. Treasury debt rose on Tuesday as a looming battle in Washington over the government's borrowing limit and a recovery in the yen eased demand for riskier assets.
Investors were cautious as Republican opposition in Congress to increase the $16.4 trillion ceiling raises the risk that the United States could default on its debt in coming months.
A warning by Federal Reserve Chairman Ben Bernanke on the economic effects of any failure to agree to a higher ceiling, a Treasury prediction the limit could be hit by mid-February and President Barack Obama's tough negotiating stance hit equity markets, which have gained since the New Year.
A contraction in manufacturing in New York state for a sixth straight month in January also weighed on stocks.
The contraction in the New York Fed's "Empire State" general business conditions index came as a surprise, with economists polled by Reuters expecting a flat reading.
"There's a little bit of a risk off trade," said Thomas Graff, fixed-income portfolio manager at Brown Advisory in Baltimore. "It looks like stocks reacting negatively to the wrangling over the U.S. debt ceiling, so Treasuries are higher."
The likelihood of the United States not raising the debt ceiling and declaring default is "very low," Graff said.
The Dow Jones industrial average was down 27.13 points, or 0.20 percent, at 13,480.19. The Standard & Poor's 500 Index was down 4.29 points, or 0.29 percent, at 1,466.39. The Nasdaq Composite Index was down 20.91 points, or 0.67 percent, at 3,096.60.
The MSCI world equity index slipped to 349.26, still near an 18-month high, while Europe's FTSE Eurofirst 300 index of top shares fell 0.3 percent in choppy trade to 1,156.59.
World share markets and corporate bonds have risen sharply this year on a widely held view that the Fed's supportive monetary policies will boost the U.S. economic recovery while keeping returns on safe-haven assets such as Treasuries low.
The benchmark 10-year U.S. Treasury note was up 8/32 in price to yield 1.8184 percent.
The yen gained against the dollar, rebounding from four straight days of losses that pushed it to a 2-1/2 year low, as a warning from a Japanese minister about the disadvantages of excessive yen weakness prompted investors to shed bearish bets.
The dollar was down 0.78 percent at 88.76 against the yen. The euro was down 0.36 percent at $1.3334.
Brent crude oil fell 62 cents to $111.26, while U.S. light sweet crude oil fell 34 cents to $93.80 per barrel.