World shares slip as fiscal talks sour

NEW YORK (Reuters) - World stocks trimmed gains on Wednesday after reaching a 17-month high as talks to avert the U.S. "fiscal cliff" appeared to stall, braking a surge in the euro as it rose on 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 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. Republican speaker of the House of Representatives, John Boehner, called Obama "irrational."

Boehner said 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.

Global equity markets and other assets seen as "risky" rose earlier in the session on expectations the impasse over the U.S. budget will be resolved. Oil prices rose on hopes a resolution to the fiscal cliff would spur crude demand.

"There was a risk-on tone when we started the day globally. All markets were looking to go higher, and I think crude has fed off that," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

The Dow Jones industrial average <.DJI> closed down 98.99 points, or 0.74 percent, at 13,251.97. The Standard & Poor's 500 Index <.SPX> fell 10.98 points, or 0.76 percent, at 1,435.81. The Nasdaq Composite Index <.IXIC> slid 10.17 points, or 0.33 percent, at 3,044.36.

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.

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.

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 evident earlier 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 pushed MSCI's all-country world equity index <.MIWD00000PUS> to levels last seen in July 2011. But the index trimmed gains, rising 0.09 percent to 341.75 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 0.05 percent to 1.3236 to the dollar after hitting 112.49, its highest since August 2011. Against the yen, it gained 0.30 percent to 111.70, its highest since August 2011.

The dollar index <.DXY> fell 0.05 percent to 79.325 after hitting a two-month low of 79.008.

The benchmark 10-year U.S. Treasury note rose 5/32 in price to yield 1.8014 percent.

(Additional reporting by Richard Hubbard in London; Editing by Chizu Nomiyama, Dan Grebler, Leslie Adler and Andrew Hay)