GLOBAL MARKETS-Stocks, dollar fall as shutdown enters 3rd day
* U.S. govt stays shut, debt ceiling deadline looms
* U.S. 1-month T-bill rates highest since November
* Wall Street slumps, dollar hit eight-month low
By Wanfeng Zhou
NEW YORK, Oct 3 (Reuters) - Major stock markets fell while the dollar dropped to an eight-month low on Thursday with no end in sight to the budget fight in Washington that has shut down the government for a third day.
Worries also grew about the more important battle over the U.S. debt ceiling in coming weeks, sending U.S. one-month Treasury bill rates to their highest level since November. Failure to raise the $16.7 trillion borrowing limit by Oct. 17 will lead to a U.S. default and roil global markets.
Market volatility could rise if the deadlock continues as concern about the economic impact mounts. Goldman Sachs estimated a short-term shutdown would slow U.S. economic growth by about 0.2 percentage point, while a weeks-long disruption could weigh more heavily - 0.4 percentage point - as furloughed workers scale back personal spending.
President Barack Obama met with Republican and Democratic leaders in Congress late Wednesday to try to break the budget deadlock that has shut down wide swaths of the government, but there was no breakthrough and both sides blamed each other. Obama's healthcare law was at the center of the impasse.
"People thought the shutdown would last one or two days, and now it appears it could be much longer than that. No one knows what to do, and there's a question about whether to start reducing risk now," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
MSCI's world equity index, which tracks shares in 45 countries, fell 0.3 percent to 382.96. It has lost more than 2 percent since its recent high on Sept. 19.
The Dow Jones industrial average dropped 128.73 points, or 0.85 percent, to 15,004.41. The Standard & Poor's 500 Index lost 14.84 points, or 0.88 percent, to 1,679.03. The Nasdaq Composite Index fell 30.69 points, or 0.80 percent, to 3,784.33.
Some analysts say, the S&P 500, having dropped in eight of the past 10 sessions on worries about the deadlock in Washington, could provide a buying opportunity.
"In the short term, this uncertainty could cause a lot of disruption," said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
"But if you have a longer-term time frame, this might be a positive. We thought the market had gotten ahead of itself, so this could be a chance to get in."
The dollar fell 0.2 percent against a basket of currencies, having reached an eight-month low of 79.730 as the shutdown diminishes the chances of the Federal Reserve will reduce its monetary stimulus this year.
The euro rose 0.4 percent to $1.3625, having hit its highest in eight months, after data showed growth in services companies, comprising the vast bulk of the euro zone's private sector, increased in September at the fastest pace since June 2011 while retail sales rose much more than expected in August.
European shares dropped 0.5 percent to 1,241.52 points.
U.S. DEFAULT RISK
As concerns over a U.S. default have intensified, the cost to insure Treasuries has soared in the credit default swaps market.
Investors would pay about 46,000 euros to insure 10 million euros worth of Treasuries for a year on Thursday, according to Markit. This was the highest premium on one-year U.S. sovereign debt since July 2011 during the first debt ceiling showdown between President Barack Obama and top Republican lawmakers.
Interest rates on Treasury bills that will come due between the debt ceiling deadline and the end of October also rose on default worries. The rate on the T-bill issue due Oct. 31 touched 0.17 percent, the highest level since November. This compared with the 0.03 percent on the T-bill due the following week.
Benchmark 10-year Treasury notes were up 4/32 in price with a yield 2.603 percent.
Failure to raise the U.S. debt ceiling could damage not only the United States but the rest of the global economy, International Monetary Fund chief Christine Lagarde said on Thursday.
Earlier, U.S. data showed the number of Americans filing new claims for jobless benefits edged up last week, while growth in the U.S. services sector cooled last month.
The U.S. Labor Department on Thursday said the government's employment report for September will not be released as scheduled on Friday due to the government shutdown and a new release date had not yet been set. [ID:nL1N0HT0S4}
Spot gold traded little changed $1,316 an ounce as investors booked profits after the previous session's gains. The metal rose 2.2 percent on Wednesday, posting the biggest daily gain in two weeks.
Brent crude gave up early gains sparked by strong data from China. Activity in China's services sector expanded at the fastest pace in six months in September as demand grew, cementing a modest pick-up in the world's second-largest economy.
Brent crude was last down 24 cents to $108.95 a barrel. U.S. oil fell 76 cents to $103.34 a barrel.
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