World stocks fall on debt fear; gold at record

US and European stocks fell for a third straight day on Wednesday and gold soared to another record high as investors shed riskier assets and sought safety on growing fears of a possible US debt default.

The US dollar fell to a fresh all-time low against the Swiss franc and a four-month trough against the Japanese yen as investors moved out of dollar assets.

A Republican plan to cut the US deficit faced delay and stiff opposition, raising the risk of default and a ratings downgrade as the clock ticks towards a deadline less than a week away. The cost of insuring US government debt against a default within a year rose to a record high.

"Investors are being held back from risk (trade) because of all these headlines out of Washington," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

Even if a plan avoids a default, if it flinches from hefty deficit cuts this could result in a downgrade of the US government's triple-A rating and raise borrowing costs, dealing a severe blow to the economic recovery.

Analysts polled by Reuters expect the United States will probably lose its top-notch AAA credit rating from at least one major rating agency, believing the wrangling over the debt ceiling has already damaged the economy.

Wall Street stocks opened lower. The Dow Jones industrial average dropped 112.47 points, or 0.90%, to 12,388.83. The Standard & Poor's 500 Index fell 17.39 points, or 1.31%, to 1,314.55. The Nasdaq Composite Index lost 45.72 points, or 1.61%, to 2,794.24.

World shares as measured by MSCI fell 0.9%. The FTSEurofirst 300 was down 1.1%. European shares have also been hit by worries over the euro zone debt crisis, where there are still strains despite a second Greek bailout plan.

Japan's Nikkei closed down half a percent.

Safe havens shine

The debt impasse drove investors to seek safe havens for their money, most noticeably gold and the Swiss franc.

Gold prices hit record highs for the sixth time in two weeks and silver and palladium rallied. Spot gold rose as high as USD 1,628, before easing to around USD 1,625.

"If there isn't a last minute compromise (in the US debt talks) then the situation will get more and more critical. Gold is one of the alternatives to US Treasuries and therefore there is further upside potential," said Peter Fertig, a metals consultant at Quantitative Commodity Research.

The dollar hit a fresh record low of 0.7996 Swiss franc on trading platform EBS. It also fell to a four-month trough at 77.57 yen , approaching a record low of 76.25 set in March, raising concerns Japanese authorities may intervene to stem the yen's strength.

Against a basket of currencies, the dollar index fell as low as 73.421, a 2-1/2 month low, before bouncing back to last trade at 73.707, up 0.3% on the day.

The benchmark 10-year Treasury note traded flat in price for a yield of 2.96%. Prices earlier weakened as traders prepared room for USD 35 billion of fresh five-year note supply.