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posted: 12/21/2012 7:17 AM

U.S. budget negotiations setback drives stocks down

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  • Money traders work under flags of the United States and Japan at a foreign exchange firm in Tokyo Friday.

    Money traders work under flags of the United States and Japan at a foreign exchange firm in Tokyo Friday.
    Associated Press

Associated Press

PARIS -- Another failed attempt find a compromise in U.S. budget negotiations sent world stock markets plummeting Friday, as investors feared the world's largest economy could teeter into recession if no deal is found.

Without an agreement, the U.S. economy will fall off the so-called "fiscal cliff" on Jan. 1 when Bush-era tax cuts expire and spending cuts kick in automatically. The measures were designed to have a negative effect on the U.S. economy, in the hopes that feared outcome would push lawmakers and President Barack Obama to find a deal.

"We've seen Europe's politicians repeatedly flirt lemming-like with cliff-diving in 2012, and now it's the turn of U.S. `leaders,"' said Kit Juckes, an analyst with Societe Generale. "The nagging fear is always there, that someone, on one side of the Atlantic or the other, will forget to let rational thought take over at the last second."

Amid the uncertainty, European shares fell. France's CAC dropped 0.7 percent to 3,642, while the DAX in Germany dropped 0.9 percent at 7,605. The FTSE index of leading British shares retreated 0.9 percent to 5,908.

The euro also fell sharply, dropping 0.1 percent to $1.3220.

In Asia, Japan's Nikkei 225 index closed 1 percent lower at 9,940.06. Hong Kong's Hang Seng lost 0.7 percent to 22,506.29. South Korea's Kospi shed 1 percent at 1,980.42. Australia's S&P/ASX 200 fell 0.2 percent to 4,623.60. Mainland Chinese stocks were mixed.

U.S. stock futures tumbled after rank-and-file Republican lawmakers failed to support an alternative tax plan by House Speaker John Boehner late Thursday in Washington. That plan would have allowed tax rates to rise on households earning $1 million and up. Obama wants the level to be $400,000.

Dow Jones futures dropped 1.5 percent to 13,072, while Standard & Poor's futures fell 1.6 percent at 1,418.

The two leaders have significantly narrowed their differences toward a compromise, but the latest setback leaves little left to find a deal.

"The fiscal cliff is a real threat not just for U.S. growth next year but for the outlook for global growth," said Jane Foley, currency analyst with Rabobank.

When growth slows, energy demand does, too, and oil prices fell in anticipation.

Benchmark crude for February delivery fell $1.29 cents to $88.84 per barrel in electronic trading on the New York Mercantile Exchange.

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