World stock markets sink over U.S. debt fears

World stocks sank Thursday as U.S. lawmakers struggled for another day to come up with a compromise that would prevent a debt default in the world's biggest economy.

World stocks sank Thursday as U.S. lawmakers struggled for another day to come up with a compromise that would prevent a debt default in the world's biggest economy.

Oil fell to near $97 US a barrel. The U.S. dollar weakened against the yen and strengthened against the euro.

Investors were growing increasingly anxious as the U.S. government came another day closer to an Aug. 2 deadline to raise the country's $14.3 trillion US borrowing limit.

If there is no legislation in place by then, officials say the U.S. Treasury will not be able to pay all the nation's bills and possibly trigger a default on its debts. Investors are worried such a default would send shockwaves through the global financial markets as the U.S. economy is still struggling to recover from the worst recession in decades.

In early European trading, the FTSE 100 index of leading British shares was down 0.1 per cent at 5,852.58 while Germany's DAX fell 0.8 per cent to 7,192.17. The CAC-40 in France was down 0.5 per cent at 3,713.76.

However, Wall Street appeared poised to rebound after a big drop the day before. Dow futures were up 0.4 per cent at 12,288 while the broader Standard & Poor's 500 futures rose 0.4 percent at 1,304.70.

Japan's Nikkei 225 stock average sank 1.5 per cent to close at 9,901.35 and South Korea's Kospi fell 0.8 per cent to end at 2,155.85. Australia's S&P/ASX 200 dropped 1.6 per cent to finish at 4,463.80.

Hong Kong's Hang Seng Index edged up 0.1 per cent to close at 22,570.74 after spending most of the day in negative territory.

Mainland China's Shanghai Composite Index declined 0.5 per cent to 2,708.78 while the smaller Shenzhen Composite Index lost 0.1 per cent to 1,189.13. Shares in oil and coal companies led gains while cement companies weakened.

Benchmarks in New Zealand, Taiwan and India also fell.

The House of Representatives plans a vote Thursday on a Republican plan to cut spending and raise the borrowing limit. Senate leaders are watching what happens to that plan before moving ahead with their own.

Debt limit deadline looming

As the Aug. 2 deadline is "looming and no progress has been made so far, the worries over the US credit rating downgrade and debt default has spread to the equity market as well," strategists at Credit Agricole CIB wrote in a research note. "For the day ahead, [the] market mood will likely remain downbeat."

Investors have found little to offset fears that the debt deadlock could spoil the global economic recovery.

"In Asia markets, all the news is bad news," said Linus Yip, chief strategist at First Shanghai Securities in Hong Kong.

He noted recent signs of economic trouble in Asia, including Indian authorities raising interest rates for the 11th time in less than a year and a half to contain inflation and South Korea's economic growth slowing.

Inflation also remains a major worry in China, he said.

In currencies, the U.S. dollar weakened to 77.68 yen from 78.06 late Wednesday in New York. The euro rose to $1.4382 from $1.4372. Benchmark oil for September delivery was up 36 cents to $97.76 a barrel in electronic trading on the New York Mercantile Exchange.

Crude lost $2.19 to settle at $97.40 US on Wednesday.