A warning that the U.S. may lose its cherished triple A credit rating and concerns over Europe's debt problems weighed on stock markets Thursday, though an indication that the Federal Reserve could provide more monetary stimulus limited losses.
Moody's warned late Wednesday that it may downgrade its view on the U.S. because of the failure of the White House and Congress to raise the $14.3 trillion borrowing limit and avoid a default.
"The review of the U.S. government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes," Moody's said. "As such, there is a small but rising risk of a short-lived default."
Though most analysts think the politicians will agree to raise the threshold by the early August deadline, the warning reminded investors that high debt is not just a European problem and knocked confidence in the markets.
"Further talks (between the White House and Congress) are scheduled today and investors will continue to watch the situation, which is likely to keep both the dollar and stock market somewhat sensitive," said Joshua Raymond, chief market strategist at City Index.
In Europe, the FTSE 100 index of leading British shares was down 1.1 percent at 5,842 while Germany's DAX fell 1 percent to 7,199. The CAC-40 in France was 1.2 percent lower at 3,747.
U.S. stocks were set for only modest losses despite the Moody's warning amid indications that the Fed may pump more money into the U.S. economy. On Wednesday, Fed chairman Ben Bernanke said the U.S. central bank is prepared to provide additional stimulus if the current economic lull persists.
Dow futures were down only 0.1 percent at 12,416 while the broader Standard & Poor's 500 futures fell an equivalent rate to 1,312.
Attention later will also focus on monthly retail sales figures as well as quarterly earnings from JPMorgan Chase & Co. Earnings from Google Inc. after Wall Street closes could well be a key factor in how stocks end the week.
Investors are also keeping a close watch on developments in the eurozone, especially on Italy. Earlier this week, worries that Italy and Spain would be dragged into the debt crisis that has already seen Greece, Ireland and Portugal bailed out, hit market sentiment.
However, an acceleration in the Italian government's budget proposals has helped calm tensions somewhat, despite news that the government had to pay a far higher interest rate in a five-year bond auction.
Italy's finance minister has vowed that the austerity measures, which aim to balance the budget by 2014, will get final approval by the lower house of parliament on Friday, as opposed to the earlier plan of sometime in August.
The easing in tensions over Europe's debt crisis has been evident in the currency markets. The euro has recovered since Tuesday, when it slid to below $1.39. By late morning, the euro was 0.2 percent lower at $1.4193.
Earlier in Asia, Japan's Nikkei 225 stock average finished down 0.3 percent at 9,936.12, while Hong Kong's Hang Seng index inched up 0.1 percent to 21,940.20. The Shanghai Composite Index climbed 0.5 percent to 2,810.40.
Oil prices hovered near $98 a barrel as traders mulled a possible new round of U.S. monetary stimulus.
Benchmark crude for August delivery was up 23 cents at $98.28 a barrel in electronic trading on the New York Mercantile Exchange.