* Progress stalls on U.S. debt, budget talks
* Dollar gains, but U.S. stocks edge lower after weak debt auction
* Gold steadies after falling to 3-month low
NEW YORK, Oct 15 (Reuters) - Mixed signals from Washington on progress in the budget and debt talks left markets confused on Tuesday, boosting the dollar, but U.S. stocks slipped and an auction of short-term U.S. Treasury debt drew weak demand.
The U.S. political standoff initially 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.
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." But comments by House Speaker John Boehner that no decision had been made deflated some of that optimism.
The uncertainty over the U.S. debt ceiling caused the Treasury's weekly auctions of three- and six-month bills to draw below-average demand. The value of bids received over those accepted was the lowest since 2009, said Stone & McCarthy Research Associates analyst Cathy Guo.
Earlier, Treasury rates on T-bill issues due in October to November had fallen to their lowest level in a week, although they remained elevated compared with three weeks ago.
"Clearly, this is going to go to the twelfth hour and possibly beyond," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
"There is obviously a problem. The debt ceiling used to be raised like clockwork and clearly we can't go through this multiple times a year. We need a long-term resolution to this process."
MSCI's world equity index, which tracks shares in 45 countries, was up just 0.03 percent, though it remained close to a five-year high hit in September prior to the crisis in Washington.
The Dow Jones industrial average was down 53.43 points, or 0.35 percent, at 15,247.83. The Standard & Poor's 500 Index was down 4.63 points, or 0.27 percent, at 1,705.51. The Nasdaq Composite Index was down 7.95 points, or 0.21 percent, at 3,807.32.
Shares of Citigroup fell in early trading after weaker-than-expected quarterly earnings, but subsequently rose 6 cents to trade at $49.66.
In Europe, the FTSEurofirst 300 was up 0.9 percent.
In the U.S. Treasury bill market, most U.S. Treasuries prices were narrowly lower. 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. The benchmark 10-year U.S. Treasury note was down 12/32, the yield at 2.7258 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 was last up 0.4 percent at 80.608 and touched its highest since Sept. 18.
Gold, whose safe-haven appeal is usually burnished during times of uncertainty, was down slightly 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, but recovered to $1,271.21, down 0.1 percent.
Oil prices were lower after Iran presented a proposal over its nuclear program at talks in Geneva. Brent was traded 81 cents lower at $110.23 a barrel. U.S. oil was down 74 cents at $101.68.
The euro was down 0.6 percent on the day and last traded at $1.3483 after touching a two-week low of $1.3478.
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.