* Optimism on U.S. debt talks spurs dollar higher
* Wall St lower as Citi results offset Washington optimism
* Gold steadies after falling to 3-month low
NEW YORK, Oct 15 (Reuters) - Global equities markets rose and the dollar strengthened on Tuesday on signs of progress in Washington's budget and debt talks, though U.S. stocks edged lower on Citigroup's weaker-than-expected quarterly earnings.
The political standoff in Washington showed signs of giving way to a Senate deal to reopen federal agencies and prevent a damaging default on federal debt. The deadline to lift the U.S. debt ceiling is Oct. 17.
U.S. Senate Majority Leader Harry Reid, a Democrat, and his Republican counterpart, Mitch McConnell, ended talks on Monday with Reid saying they had made "tremendous progress".
Signs of optimism are building and "investors are showing increasing signs of confidence that default will be averted," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.
MSCI's world equity index, which tracks shares in 45 countries, was up 0.1 percent, close to a five-year high hit in September prior to the crisis in Washington.
The Dow Jones industrial average was down 14.45 points, or 0.09 percent, at 15,286.81. The Standard & Poor's 500 Index was down 0.34 points, or 0.02 percent, at 1,709.80. The Nasdaq Composite Index was up 5.49 points, or 0.14 percent, at 3,820.77.
Shares of Citigroup fell in early trading but subsequently rose 6 cents to trade at $49.66.
In the U.S. Treasury bill market, most U.S. Treasuries prices were narrowly lower and short-term bill rates were the lowest in a week.
Treasury rates on T-bill issues due in October to November fell to their lowest level in a week, although they remained at elevated levels compared with three weeks ago.
The one-month Treasury bills due on Nov. 7 are the most sensitive to efforts to raise the statutory $16.7 trillion borrowing limit, which expires on Thursday. The benchmark 10-year U.S. Treasury note was down 12/32, the yield at 2.7239 percent.
The dollar rose to touch a one-month high against a basket of currencies, buoyed by the optimism over possible progress in Washington.
The dollar index rose 0.45 percent to 80.624, its highest since Sept. 18.
"There is a glimpse of good news from the U.S. government and markets are adding to risk positions," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
Gold, whose safe-haven appeal is usually burnished during times of uncertainty, steadied after an early drop to three-month lows tempted some buyers back to the market.
Spot gold plunged to its lowest since July 10 at $1,251.66 in early trade, but recovered to $1,271.21.
Oil prices were lower after Iran presented a proposal over its nuclear program at talks in Geneva. Brent was trading 64 cents lower at $110.40 a barrel. U.S. oil was down 45 cents at $101.96.
In Europe an unexpected rise in German analyst and investor sentiment lifted the outlook for the region's largest economy.
The influential ZEW Institute's monthly poll of economic sentiment rose to its highest level since April 2010 and beat a Reuters poll forecast for no change.
A separate report on price pressures in Britain showed inflation was higher than expected in September and house prices had risen sharply, adding to doubts over how long the central bank can hold down interest rates.