NEW YORK World stocks and the euro slipped on Friday while U.S. shares fell for a fifth day as the White House and U.S. lawmakers planned to make a late effort to avoid the U.S. "fiscal cliff."
Meanwhile, 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.
Participants in the 3 p.m. session (2000 GMT) 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.
The MSCI all-world share index .MIWD00000PUS was down 0.2 percent and the pan-European FTSEurofirst 300 .FTEU3 ended down 0.6 percent.
In U.S. trading, the Dow Jones industrial average .DJI was down 69.42 points, or 0.53 percent, at 13,026.89. The Standard & Poor's 500 Index .SPX was down 6.77 points, or 0.48 percent, at 1,411.33. The Nasdaq Composite Index .IXIC was down 8.42 points, or 0.28 percent, at 2,977.48.
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.
"The recent market movement is all about the lack of resolution and clarity on the 'cliff' and comes despite the fact that most economic reports have been very favorable," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments. "We have to believe, once Congress comes to any resolution - whether it comes before the New Year or after - the market will resume its upward trend, as data indicates it should."
Among Wall Street's gains, Barnes & Noble Inc (BKS.N) rose 6.4 percent to $15.27 after the company said Pearson (PSON.L)(PSO.N) had agreed to make a strategic investment in its Nook Media subsidiary. However, it said the Nook business will not meet the bookseller's prior projection for fiscal year 2013.
EURO FALLS, YEN HITS LOW
The euro was down 0.1 percent on the day at $1.3221, having slipped to a session low of $1.3164. Traders said it broke below stop-loss sell orders around $1.3170.
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 or snags in the negotiations would be deemed positive for the safe-haven and highly liquid dollar.
"Speculative market participants are not very happy with these levels and look at it as a good opportunity to sell the euro, which is leading to the rapid drop in euro/dollar," said Ulrich Leuchtmann, head of FX research at Commerzbank.
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 86.11 yen, edging away from a peak of 86.64 yen, its strongest since August 2010, when it stopped just shy of reported options barriers at 86.75 yen 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 4/32 in price, with yields falling to 1.72 percent, down from 1.73 percent on Thursday and from a two-month high of 1.85 percent a week and a half ago.
BRENT OIL EASES
Brent crude oil held below $111 per barrel, not far off its highest this month.
Brent crude was down 59 cents to $110.21, on course for a weekly gain of about 1.5 percent and a full-year increase of about 3 percent, which would be the smallest in four years.
U.S. crude was down 19 cents to $90.67 and was set for its first yearly loss in four years.
In other commodity markets, U.S. gold for February eased $2.00 an ounce to $1,661.70.
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 Gertrude Chavez-Dreyfuss, Ryan Vlastelica and Karen Brettel in New York and Lewa Pardomuan in London; Editing by Giles Elgood, David Stamp, Kenneth Barry and Dan Grebler)
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