* World shares drop for 3rd day on U.S. deadlock
* Yellen nomination as Fed chief provides limited relief
* Dollar makes gains on yen and Swiss franc
* Brent oil dips below $110, gold eases
By Richard Hubbard
LONDON, Oct 9 Janet Yellen's expected nomination to head the Federal Reserve boosted the dollar and was set to give Wall Street an early lift on Wednesday as it ended uncertainty, though the U.S. budget deadlock continued to weigh on markets.
A White House official said U.S. President Barack Obama would nominate Yellen, currently deputy chief at the Fed, to head the central bank later in the day.
She is seen as largely sticking to policies of her predecessor Ben Bernanke, including maintaining the bank's commitment to stimulus to keep economic recovery on track.
"In the face of improving (economic) figures but looming uncertainty, markets can expect Yellen to continue with a cautious hand on the tiller," said Anne Richards, chief investment officer at Aberdeen Asset Management.
However, many market participants expect the positive impact of the nomination to be short-lived given the lack of progress to end political wrangling in Washington that could lead to a U.S. debt default next week.
Those worries sent European shares to a fresh one-month low on Wednesday, although the Yellen decision attracted some buyers expecting the U.S. central bank to move carefully in unwinding its equity-friendly stimulus.
"It's the Yellen effect that has brought financial market stabilisation," said Oliver Roth, head trader at Close Brothers Seydler.
Earlier the MSCI index of Asia-Pacific shares outside Japan had dipped on the budget deadlock, losing 0.3 percent, and MSCI's world index was still down 0.1 percent, its lowest level since Sept. 9.
U.S. stock index futures pointed to a slight rebound in the Standard & Poor's 500 index, which shed 1.2 percent on Tuesday for its biggest one-day drop in nearly six weeks.
Investors remain nervous over the implications of the deadlock in Washington as shown by a rise in the implied volatility on euro zone equities, seen as a crude barometer for risk aversion, which has jumped 30 percent in nearly two weeks to 21.1.
It was only at two-thirds of the level seen in the summer of 2011 during the last big crisis over the debt ceiling.
The main U.S. fear gauge, the CBOE Volatility Index, stands at its highest level since June 20 having risen 21.5 percent in the past two days on heavy volumes.
Yellen's dovish stance on policy meant her appointment had previously been seen as a net negative for the U.S. currency, but the budget calculus appears to have changed that for the moment.
"In the past when Yellen's nomination became more likely, we saw dollar weakness and suddenly we are seeing dollar strength," said Ulrich Leuchtmann, head of FX research at Commerzbank.
"My interpretation is that we are at the moment in the phase where we might get into very deep trouble with the U.S. budget crisis and if that is the case, it would be good to have a Fed which would be very reactive and this is good for the dollar."
As a result the dollar gained about 0.5 percent to 97.30 yen , moving away from a two-month low of 96.55 touched on Tuesday. It was also up 0.5 percent against the safer Swiss franc at 0.9084 francs.
Investors in short-term money market were still taking precautions against the possibility of a U.S. default by shunning U.S. debt maturing in late October and early November. The yield on four-week U.S. Treasury bills stood at around 0.25 percent, just below Tuesday's five-year high of 0.3 percent .
Yellen's appointment, the disruption to the U.S. economic data flow from the government shutdown and the unknown impact of the budget impasse on the economy has also convinced many that the Fed will keep pumping cash into the economy into next year.
Minutes of the Fed's September meeting, due at 1800 GMT, may offer the market some clue as to the outlook though most will be scrutinising the report for the reasons behind the central bank's shock decision not to start scaling back its stimulus.
In the commodity markets gold was stuck in a tight range by the U.S. budget impasse, while oil prices eased below $110 a barrel on concerns that the impact on investor confidence could hurt demand for oil.
Spot gold eased 0.7 percent to $1,310 an ounce well within its recent range of between $1,300 and $1,330 an ounce.
"The support for gold will strengthen as we get nearer to the critical (debt ceiling deadline) next week," said Song Seng Wun, an economist at CIMB.