Investors are concerned that political maneuverings could delay the passage of bills needed to keep the U.S. government running beyond September 30 and avoid a debt default, threatening a still fragile economic recovery.

Moves by Republican lawmakers on Thursday did not bode well for a prompt resolution that would avoid a Federal shutdown on October 1 and a debt default in mid-October, setting the stage for a tense weekend of talks.

The impasse has sent the cost of insuring against a U.S. sovereign default to its highest level in four months. U.S. stock index futures signaled a weak start on Wall Street .N and the dollar slipped by around 0.1 percent against a basket of major currencies .DXY.

"Everyone instinctively wants to believe a last minute compromise is likely, but the political brinkmanship does raise the prospect that they will crash the car," said Ned Rumpeltin, head of G10 FX Strategy at Standard Chartered Bank.

Beyond the budget impasse and month- and quarter-end flows, investors are focused heavily on U.S. Federal Reserve meetings in October and December, with some expecting it to stick with its $85 billion monthly monetary stimulus until early 2014 to ensure economic recovery is entrenched.

The MSCI world equity index .MIWD00000PUS fell 0.1 percent but remained on course for its best monthly gain in almost two years - broadly a reflection of greater optimism about the U.S. and world economies since the summer.

ITALIAN THREAT

European stock markets stood out, turning more sharply lower after an Italian debt auction highlighted increasing concerns about a political crisis in Rome.

Milan's main share index, the FTSE MIB .FTMIB fell 1 percent, the worst performance among European indexes, after Italy was forced to pay the highest yield since June to borrow over 10 years at the sale.

The broader FTSE Eurofirst 300 index .FTEU3 .EU was down 0.5 percent and yields on low risk 10-year German government bonds dipped 3 basis points after the Italian auction, though its moves were checked by a busy upcoming diary of events.

The European Central Bank's monthly policy meeting next week could see more to support for the region's recovery while a series of data releases, including surveys of purchasing managers will shed more light on the strength of the recovery.

"With the political jitters in the U.S. overhanging the market..., core government bonds remain pretty well supported, but investors are reluctant to extend positions ahead of next week's key events," said RIA Capital Markets strategist Nick Stamenkovic.

Optimism over the outlook for about the euro zone's 9.5-trillion euro economy is currently running at highest levels in two-years, according the latest sentiment survey by the European Commission released on Friday.

On currencies, the yen rose against the weaker dollar after Japanese Finance Minister Taro Aso said he was not thinking of lowering the corporate tax rate now.

Sterling rose to $1.6133 against the dollar after Bank of England Governor Mark Carney was quoted as saying he saw no need for more bond-buying by the central bank.

The euro edged up 0.1 percent to $1.3496, off a seven-month high of $1.3569 hit last week.

Brent crude dropped below $109 a barrel to be on course for its third straight weekly loss as diplomatic efforts over Syria and Iran help ease worries about risks to supply from the Middle East.