World stocks set to end year with gains of 15 percent

The U.S. Capitol building is pictured as lawmakers return from the Christmas recess in Washington December 27, 2012.

LONDON (Reuters) - World stocks were set to end the year up 15 percent but dipped on Monday as U.S. politicians prepared for last-minute talks to avoid a fiscal crunch of spending cuts and tax hikes that could drag down the world economy.

In Washington, the two political parties are set to hold further talks to try and find a way to avoid the $600 billion "fiscal cliff" due to kick in from the start of January.

Senate Majority Leader Harry Reid said the Senate would resume sitting at 11 a.m. Washington time on Monday (1600 GMT), to continue discussions, but there were still significant differences between the two sides.

After a subdued day in Asia, where Japan's Nikkei as well as a number of other indexes had already shut for the year, European stock markets opened fractionally lower.

The pan-European FTSEurofirst 300, which has risen roughly 16 percent this year, was down 0.1 percent as London's FTSE and the Paris CAC 40 both started a shortened trading day in negative territory. German markets were closed.

"Volumes are very depressed and we're going to see a lot of cash off the table and investors are probably going to take profit on cyclical shares," Ishaq Siddiqi, a market strategist at ETX Capital, said.

Siddiqi said a failure to avert the "fiscal cliff" may push the FTSE back to a late November low of 5,800 in the coming sessions.

Midnight on Monday marks the deadline for a U.S. budget deal, though the government can pass legislation in 2013 that retroactively prevents going over the cliff, an option that is viewed as politically easier.

In currency markets, the U.S. dollar last stood at 85.78 yen, having retreated from Friday's high of 86.64 yen, which was the greenback's strongest level versus the Japanese currency since August 2010.

As the year draws to a close, the dollar is up about 11.9 percent against the yen, putting it on track for its biggest percentage gain versus the Japanese currency since 2005.

The euro was down 0.16 percent to $1.3192 on Monday. 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 haven and highly liquid dollar.

Gold was $1,664.10 an ounce by 0810 GMT, up around 6 percent for the year and is on track for a 12th consecutive year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks.

Oil prices slipped on Monday for a third consecutive session on the U.S. budget crisis, with failure to reach a solution seen likely to cause a large drop in fuel consumption.

Brent crude slipped 23 cents to $110.39 a barrel, but is set to post a 2.8 percent year-on-year increase in 2012, up for a fourth consecutive year.

(Additional reporting by Francesco Canepa; Editing by Giles Elgood)