Stocks fell on both sides of the Atlantic overnight, while US Treasuries gained as the midnight deadline to reach an agreement on continuing to fund the US government approached with no deal in sight.
At the centre of the standstill is President Barack Obama's Affordable Care Act, which Tea Party activists in the Republican party are determined to block. Congress is scheduled to meet later today in a final effort to end the stalemate.
"I'm afraid, based on what Speaker [John] Boehner has said so far, that we are going to look at a shutdown," Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, told Bloomberg on Monday.
US Treasuries climbed, pushing yields on the 10-year bond as low as 2.59 per cent, the lowest level in nearly seven weeks.
In late afternoon trading in New York, the Dow Jones Industrial Average dropped 0.74 per cent, the Standard & Poor's 500 Index shed 0.43 per cent, and the Nasdaq Composite Index fell 0.17 per cent.
Declines in shares of Procter & Gamble and Coca-Cola, 1.8 per cent and 1.6 per cent weaker respectively, paced losses in the Dow; Cisco, Intel, and Johnson & Johnson were the only stocks to gain in the Dow.
"I don't think there is 'panic' per se," Randy Frederick, director of trading and derivatives at Charles Schwab in Austin, Texas, told Reuters. "Some may think it's safe to move to cash and weigh out the possibilities."
Wall Street is seeking an end to the uncertainty. Chief executives of large banks including Goldman Sachs Group will meet with Obama on October 2 in an effort to urge an end to the budget impasse, Bloomberg reported, citing three people familiar with the schedule. The executives are also set to meet with Treasury Secretary Jacob Lew and several lawmakers.
On a brighter note, the Chicago Purchasing Managers index increased more than expected in September, rising to 55.7 from 53 in August. Economists polled by both Reuters and Bloomberg News had predicted a reading of 54.
In Europe, the Stoxx 600 Index finished the day with a 0.6 per cent drop from the previous close. The UK's FTSE 100 and Germany's DAX both fell 0.8 per cent while France's CAC 40 shed 1 per cent.
Italy's FTSE MIB Index closed 1.2 per cent lower as Prime Minister Enrico Letta tries to save his five-month-old coalition after several cabinet ministers heeded a call from centre-right leader Silvio Berlusconi to resign on the weekend. At the heart of the latest Italian troubles is a political dispute over Berlusconi's fraud conviction.
Even so, about 20 Italian centre-right lawmakers may break with Berlusconi if he tries to bring down Letta's coalition, Reuters reported, citing a centre-right party source.