NEW YORK (Reuters) - Wall Street slid on Wednesday after talks in Washington to avert the "fiscal cliff" appeared to stall, though world shares still managed to hit 17-month highs and the euro surged after an improved economic outlook for Germany.
Wall Street turned lower as a rise in tensions in Washington threatened to unravel significant progress made over the last week in talks that aim to slow the growth of the country's $16 trillion debt.
President Barack Obama accused Republicans of digging in their heels due to a personal grudge against him while the Republican speaker of the House of Representatives, John Boehner, called Obama "irrational." Boehner said that the House on Thursday would pass legislation that would prevent tax increases on all income below $1 million -- something that Obama has threatened to veto.
"The question has shifted to what a deal will look like and entail, and markets are taking a pause as we consider that," said Scott Eldridge, director of portfolio management at Caprin Asset Management in Richmond, Virginia.
The Dow Jones industrial average <.DJI> was down 63.24 points, or 0.47 percent, at 13,287.72. The Standard & Poor's 500 Index <.SPX> was down 7.92 points, or 0.55 percent, at 1,438.87. The Nasdaq Composite Index <.IXIC> was down 7.51 points, or 0.25 percent, at 3,047.02.
Equity markets in Europe rose as a key business survey in Germany bolstered investor sentiment by suggesting that Germany, Europe's biggest economy, was likely to bounce back quickly from a slowdown.
The growing German confidence also lifted the euro to a 16-month high against the yen and an 8-1/2 month peak versus the U.S. dollar, while Brent oil rose toward $110 a barrel.
Investors gave little importance to data that showed U.S. homebuilding permits touched their highest level in nearly 4-1/2 years in November, while ground-breaking activity dropped. The rise in building permits was led by a 10.6 percent gain in permits for multi-family homes, offsetting a 0.2 percent slip in permits for single-family homes.
In Europe, top company shares scaled 18-month highs on expectations the U.S. fiscal debacle will be averted. <.EU>
The FTSEurofirst 300 index <.FTEU3> rose 0.41 percent to end at 1,142.13, just off a 19-month closing high.
The better tone in global markets was supported by the U.S. Federal Reserve's efforts to boost the U.S. recovery, signs of growing economic momentum in China, and talk that Japan is set for a policy shift to lift itself out of recession.
The latest German Ifo Institute survey of 7,000 firms bolstered this sentiment by finding that business confidence had improved for a second straight month in December, in part because of better export prospects.
The brighter outlook has pushed MSCI's all-country world equity index <.MIWD00000PUS> to levels last seen in July 2011. But the index trimmed gains, rising 0.23 percent to 342.23 on Wednesday.
The yen weakened to its lowest point in more than 18 months against the dollar on expectations the Bank of Japan will ease monetary policy at the end of a two-day policy meeting on Thursday.
The euro rose 0.11 percent to 1.3244 to the dollar after hitting 112.49, its highest since August 2011. Against the yen, it gained 0.38 percent to 111.80, its highest since August 2011.
The dollar index <.DXY> fell 0.11 percent to 79.271 after hitting a two-month low of 79.008.
The benchmark 10-year U.S. Treasury note rose 6/32 in price to yield 1.7996 percent.
Brent crude settled $1.52 higher at $110.36 a barrel as it headed toward its highest close in two weeks. U.S. oil gained $1.58 to settle at $89.51.
(Additional reporting by Richard Hubbard in London; Editing by Chizu Nomiyama, Dan Grebler and Leslie Adler)
(c) Copyright Thomson Reuters 2012. Check for restrictions at: http://about.reuters.com/fulllegal.asp