NEW YORK World stocks slipped, the dollar gained and U.S. shares fell for a fifth day on Friday as the White House and U.S. lawmakers made a late attempt to avert the "fiscal cliff."
At the same time, expectations that Japan will inject new stimulus into its economy pushed the yen to a two-year low for a third straight day.
President Barack Obama and Democratic and Republican lawmakers were scheduled to meet on Friday afternoon as the deadline looms for reaching a budget deal to avert massive tax increases and spending cuts that could drag the economy - and others around the world with it - into recession.
The two sides will attempt to smooth over sharp differences on raising taxes on higher-income Americans and spending cuts in politically sensitive social welfare programs such as Medicare and Medicaid. But investors were skeptical that a deal could be accomplished before the deadline.
The MSCI all-world share index was down 0.3 percent and the pan-European FTSEurofirst 300 ended down 0.6 percent.
In U.S. trading, the Standard & Poor's 500 Index was down 8.95 points, or 0.63 percent, at 1,409.15, and was on track for its longest losing streak in three months.
The Dow Jones industrial average was down 93.15 points, or 0.71 percent, at 13,003.16, while the Nasdaq Composite Index was down 12.21 points, or 0.41 percent, at 2,973.69.
"There's a pretty good chance that we won't have something in hand by year-end," said Jonathan Golub, chief U.S. equity strategist at UBS, in New York. "It should be pretty obvious that that is now the majority case."
Golub, however, said investors were still counting on a deal that would avoid most of the tax hikes and spending cuts next year even if it does come after the deadline.
Allowing $600 billion of higher taxes and spending cuts to start in January would prevent U.S. debt spilling beyond a $16.4 trillion agreed limit. However, analysts fear the measures could wipe as much as 4 percent off the country's growth rate.
Energy companies were among the biggest Wall Street decliners, with shares of Exxon Mobil down 1.5 percent at $85.56.
The U.S. dollar edged up to a two-week high against major currencies as investors waited to see if U.S. politicians can strike a last-minute budget deal.
"Headline risk is likely to remain a driver of FX markets in the near term," said Eric Theoret, FX strategist at Scotia Capital in Toronto.
An agreement on the U.S. budget would be viewed as positive for riskier currencies such as the euro and Australian dollar, while a deadlock is deemed positive for the safe-haven and highly liquid dollar.
The dollar hit a two-week high against a basket of currencies at 79.930. It was last up 0.1 percent at 79.688.
The yen's unabated slide since Shinzo Abe took the helm as Japan's prime minister on Wednesday has taken the currency to two-year lows for three straight days. Abe has vowed to press for aggressive monetary stimulus to fight deflation.
The dollar was steady against the yen at 86.06 yen, having earlier risen to 86.63 yen, its strongest since August 2010. Traders reported options barriers at 86.75 and 87.00 yen.
In the U.S. bond market, benchmark Treasuries yields dropped to their lowest levels in two weeks as concerns that the economy would be harmed by tax hikes and spending cuts and a fall in consumer confidence spurred demand for safe-haven bonds.
Benchmark 10-year notes were last up 6/32 in price, with yields falling to 1.71 percent, down from 1.73 percent on Thursday and from a two-month high of 1.85 percent a week and a half ago.
U.S February crude slipped 7 cents, or 0.08 percent, to settle at $90.80. Trade was choppy, awaiting news on the U.S. budget talks, but the market was pressured by data showing that fuel stockpiles rose sharply and crude stocks fell less than expected last week.
In other commodity markets, U.S. gold futures for February delivery settled down $7.80, or 0.5 percent, at $1,655.90 an ounce in New York.
Traditionally a safe haven and inflation hedge that investors rush to in times of trouble, gold has lately behaved like a risk asset - often rising and falling with the stock market and sometimes following the dollar.
Despite the tensions over the U.S. budget talks, the mood in financial markets has been improving in recent weeks. Data from emerging economies has shown signs of a pick-up while analysts are hopeful that Europe may also soon bottom out.
A Reuters poll showed economists think China's factory activity probably expanded at its fastest pace in eight months in December.
(Additional reporting by Robert Gibbons, Wanfeng Zhou, Barani Krishnan, Edward Krudy and Karen Brettel in New York and Lewa Pardomuan in London; Editing by Kenneth Barry and Dan Grebler)
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