* Fear of U.S. default drives investors to safe-havens
* Dollar hits all-time low vs Swiss franc, gold climbs
* Bonds stumble on stalled U.S. deficit reduction talks
* Oil below $118 a barrel as U.S. debt talks stall (Updates prices)
By Wanfeng Zhou and Herbert Lash
NEW YORK,July 25 (Reuters) - Fears that the United States could suffer a ratings downgrade hit world stocks on Monday and drove money into safe-haven gold and Swiss francs as a breakdown in budget talks in Washington unsettled markets.
Prospects of a budget breakthrough that would allow the United States to raise its debt ceiling and avoid default on its bond payments faded over the weekend as lawmakers missed a self-imposed deadline to produce a deal. For details see: [ID:nN1E76N0CA]
Gold hit a record high and the dollar fell to a record low against the Swiss franc.
Also weighing on markets was Moody's decision to cut Greece's credit rating further into junk territory. Moody's said it was almost certain to slap a default tag on Greek debt as a result of a new EU rescue package. [ID:nL3E7IP0P2]
Analysts warned of further sharp selling in stocks if Washington fails to increase the debt limit and enters a technical default on its debt next month; analysts have priced in a roughly 10 percent chance of such a scenario.
Many investors are still clinging to the hope that the two major U.S. political parties will reach a compromise to increase the $14.3 trillion borrowing ceiling by Aug. 2.
"This whole game of chicken is fraught with risk," said Ken Polcari, managing director at ICAP Equities in New York. "Risk for the investors, for the consumer, to the economy, to Americans, to Europeans, risk across the board."
The Swiss franc was the biggest beneficiary of the demand
for safe havens, pushing the dollar down nearly 2 percent to an
all-time low of 0.8021 franc
Spot gold
Gold was on track for its biggest monthly gain since April on concerns over euro zone debt levels, as well as the U.S. budget negotiations. [ID:nL3E7IO0F2]
On Wall Street, the Dow Jones industrial average <.DJI> was down 42.61 points, or 0.34 percent, at 12,638.55. The Standard & Poor's 500 Index <.SPX> fell 3.61 points, or 0.27 percent, at 1,341.41. The Nasdaq Composite Index <.IXIC> was down 3.92 points, or 0.14 percent, at 2,854.91.
MSCI's all-country world equity index <.MIWO00000PUS> fell 0.4 percent.
European shares also slipped, snapping a four-day winning run, with banks falling on renewed worries about euro zone peripheral debt as well as the U.S. political gridlock. [ID:nL6E7HT1C0]
The pan-European FTSEurofirst 300 <.FTEU3> was down 0.29 percent at 1,105.69, and the Stoxx Europe 600 bank index <.SX7P> fell 2.8 percent.
Longer-dated U.S. Treasury yields rose and European shares <.FTEU3> lost ground as the debt impasse in Washington stirred more worries that political wrangling between lawmakers will prompt a cut in the United States' AAA credit rating.
The benchmark 10-year U.S. Treasury note
Brent oil futures dropped below $118 a barrel after the
weekend breakdown of U.S. budget talks in Washington, before
paring losses. Brent
U.S. oil
Copper prices also came under selling pressure, then
steadied as the lower dollar and a tight supply outlook helped
shield it from concerns about the U.S. debt outlook. Aluminum
"We have a situation where if they don't get an agreement on raising the U.S. debt level, that will be bearish for all assets," said Robin Bhar, analyst at Credit Agricole. "But bizarrely, the weakening dollar is supporting commodities." (Reporting by Chuck Mikolajczak, Robert Gibbons and Richard Leong in New York; Brian Gorman, Neal Armstrong, Naomi Tajitsu, Jessica Donati in Jan Harvey in London; Writing by Herbert Lash; Editing by Dan Grebler)