NEW YORK/TOKYO Dec 21 U.S. stock index futures fell sharply after a Republican proposal on how to avert the "fiscal cliff" failed to muster enough support on Thursday, raising concerns a deadlock could cause the world's largest economy to slip into recession.
S&P 500 stock futures shed as much as 3.8 percent at one point, and were down 1.6 percent by 0331 GMT Friday. Dow Jones stock futures dropped 1.6 percent and Nasdaq futures were down 1.5 percent.
"This is happening on the evening before the last day of the week -- ahead of the weekend. There is a lot of complacency in the market -- as many, attracted to the favourable 'action' became too comfortable over the last few weeks," said Douglas A. Kass, founder of hedge fund Seabreeze Partners Management Inc.
"It's a confidence denter as this is happening at the important end of Christmas sales period -- it's not a positive for Christmas sales activity. Investors should look for downgrades to first quarter GDP forecasts. And another risk short-term is that this event could accelerate tax selling," he said.
House of Representative Speaker John Boehner conceded that his tax bill proposal to help avert the "fiscal cliff" lacked the votes to pass, leaving only 11 days for politicians to prevent $600 billion worth of automatic tax hikes and spending cuts taking effect in the new year.
The bill, had it passed, would have put Republicans on record as supporting a tax increase on those who earn more than $1 million per year, breaking with decades of orthodoxy. It won the blessing of influential anti-tax activist Grover Norquist, but other conservative groups fiercely opposed it and many rank-and-file members said they would not support it.
President Barack Obama wants to raise taxes on families earning more than $400,000, a much lower threshold.
"The effect on markets will entirely be determined by the length of time this persists," said Dan Greenhaus, chief global strategist at BTIG LLC in New York.
"Markets in particular, and the economy in general, probably won't care all that much if this is just posturing and a deal is eventually reached. But if we stretch into mid-January, it's hard to image there won't be effects."