* Weak U.S. bill auction highlights debt concerns
* High-flying stocks hit as investors pull back from gains
* Dollar edges off near 8-month low vs major currencies
* World shares and oil trade in narrow ranges
By Barani Krishnan
NEW YORK, Oct 8 (Reuters) - The U.S. government sold one-month bills at the highest rate in five years on Tuesday as anxiety rose over whether the United States will avert a debt default, while selling accelerated in U.S. stocks, particularly among those that have run up sharply of late.
With the partial U.S. government shutdown in its second week and only nine days left for Congress to act before an Oct. 17 U.S. debt ceiling deadline, President Barack Obama said he would accept a short-term increase to avoid a default.
Yields on short-dated bills maturing in the next few weeks rose sharply, and the Treasury sold $30 billion in four-week bills at 0.35 percent, the highest since October 2008. Demand was at its weakest in four-and-a-half years, as investors have become concerned about the potential for a missed payment if the Treasury's borrowing authority is not extended with an increase in the debt limit.
Selling accelerated on Wall Street, where investors were pulling back from high-flying stocks, including a number of social media names, that have outperformed even as the broader market has come under some pressure on worries about the ongoing political back-and-forth in Washington.
The one-month T-bill rate rose above the one-month London interbank offered rate, or LIBOR, for the first time at least 12 years, according to Reuters data.
"The markets now view lending money to the U.S. for one month riskier than lending money to a bank for one month," said Guy LeBas, chief fixed-income strategist with Janney Montgomery Scott in Philadelphia.
One-month yields were at 0.36 percent, nearing the same yield as two-year notes, which yielded 0.37 percent. A survey from J.P. Morgan Securities released on Tuesday showed investors continued to raise their holdings of longer-dated Treasuries, in lieu of short-dated bills.
The Treasury Department will sell $30 billion of three-year notes at 1 p.m. (1700 GMT).
On Wall Street, the Dow Jones industrial average was down 84.97 points, or 0.57 percent, at 14,851.27. The Standard & Poor's 500 Index was down 12.42 points, or 0.74 percent, at 1,663.70. The Nasdaq Composite Index was down 57.70 points, or 1.53 percent, at 3,712.67.
Global stocks as indicated by the 45-country MSCI world equity index were off 0.5 percent.
As the partial U.S. government shutdown enters a second week, many investors still believe Republicans and Democrats can reach deals on the budget and the debt ceiling.
The broad S&P 500 has declined by only about 3 percent from all-time highs reached in September, as many investors expect a rally once the budget and debt ceiling fights are resolved.
But worries they may fail were beginning to grow. The CBOE Volatility Index, a measure of Wall Street's anxiety, rose to 20.12, up from Tuesday's 19.41 and the first time that index has hit 20 since June, a sign of rising concern.
"In our opinion markets are a little too complacent. The downside risks are horrendous if there is no resolution and the debt ceiling is breached," said Kevin Corrigan, head of credit at Lombard Odier Investment Managers.
"I'm prepared to step out at any time should it come crashing down, but for the moment I'm still betting on the upside," said Andreas Clenow, hedge fund trader and principal of Zurich-based ACIES Asset Management.
European equities traded lower after ending in negative territory for three of the last four trading sessions. The broad FTSE Eurofirst 300 index dipped 0.7 percent.
The dollar fell against the perceived safety of the yen to trade at around 97 yen. It had dropped earlier to 96.55 yen, its lowest since Aug. 12.
The dollar index, which measures the U.S. currency's value against a basket of currencies,, was flat and within striking distance of last week's eight-month low of 79.627. Traders said it remained vulnerable to further selling.
The longer the political deadlock runs, the greater the expected economic damage and the more likely it becomes that the Federal Reserve will maintain its stimulus program, which has flooded global markets with dollars.
The biggest U.S. creditors, China and Japan, have said they are increasingly worried that the developments in Washington could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.
"The risk is to the downside for the dollar as long as we don't have an agreement," said Niels Christensen, currency strategist at Nordea.
Banks and investors outside the United States were moving to ensure a steady supply of dollars to cover the critical mid-October period when the government hits the borrowing limit, paying sharply higher premiums in the forward foreign exchange market.
Gold prices rose above $1,327 an ounce as buyers in China, the second-largest market for bullion after India, returned from a week-long holiday.
Benchmark Brent crude oil traded above $110 a barrel, although the gains were expected to be short-lived given an improved supply outlook and fallout from the U.S. budget crisis. U.S. crude was up 59 cents at $103.62.