World shares stall on U.S. debt ceiling fears

A Hungarian currency trader makes a phone call at his desk in the dealing room of a brokerage in Budapest November 25, 2011.

LONDON (Reuters) - World shares stalled near 18-month highs and safe-haven Treasuries traded higher on Tuesday after U.S. Federal Reserve Chairman Ben Bernanke warned the economic recovery was at risk from the battle to raise the nation's borrowing limit

Concerns about the debt ceiling and hints from Bernanke that U.S. monetary policy may stay loose for longer than some expect also hit the dollar and sent German debt prices higher.

"Yesterday's commentary by Bernanke (is) leaving risky assets vulnerable to a correction," analysts at Morgan Stanley said in a note to clients.

President Barack Obama on Monday added to the tension over debt ceiling talks by refusing to trade cuts in government spending for a lifting the borrowing limit, which is needed to avoid a potentially disastrous default on U.S. debt.

The looming political row has stalled a New Year rally in the MSCI world equity index which was unchanged on Tuesday but near an 18-month high.

Europe's FTSE Eurofirst 300 index of top shares dropped 0.2 percent in early trade to be at a two-week low. London's FTSE 100, Frankfurt's DAX and Paris's CAC-40 all slipped by between 0.1 and 0.3 percent.

The dollar dropped about 0.7 percent to 88.95 yen though against a basket of major currencies the greenback was steady.

The fall against the Japanese currency was exacerbated by comments from Japan's Economics Minister Akira Amari warning about the negative economic impact of excessive yen weakness.

"That the yen's weakness has its downside for Japan is something the market has almost completely ignored until now," said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp.

The debt ceiling fears and a forecast increase in U.S. oil inventory sent crude prices lower. U.S. crude was down 34 cents to $93.80 a barrel and Brent eased 38 cents to $111.50.

(Editing by Anna Willard)