The Washington deadlock over raising the US debt ceiling sent stocks tumbling on Monday, as the August 2 date to avoid a government debt default grew closer with no deal in sight.

The Dow Jones Industrial Average closed down 88.36 points (0.7%) at 12,592.80.

The broader S&P 500 lost 7.59 points (0.56%) at 1,337.43, while the tech-heavy Nasdaq Composite shed 16.03 points (0.56%) to stand at 2,842.80.

“US stocks backpedalled right out of the gate today, as heightened debt concerns on both sides of the Atlantic sent buyers to the sidelines,” said Andrea Kramer of Schaeffer’s Investment Research. “In Europe, Moody’s downgrade of Greek debt reminded traders of the potential ramifications of an extended stalemate on Capitol Hill, as a failure to up the federal debt ceiling by August 2 could result in a debt downgrade – or worse, a default – for Uncle Sam.”

Democrats and Republicans battled over the weekend and again throughout Monday over whose debt-and-deficit reduction plan was better, while investors and economists urged a deal to prevent, at least, a downgrade of the country’s AAA standing as a borrower, and at worst, Washington being forced to pare 40 per cent of its spending and defaulting on its debt.

Banks were losers as the debt limit cloud darkened over the markets: Bank of America lost 1.2%, Morgan Stanley gave up 2.5%, and JPMorgan Chase fell 1.2%.

Dow Chemical added 1.2% on the announcement of a $US20 billion ($A18.53 billion) venture with Saudi oil giant Aramco.

BlackBerry maker Research in Motion lost 4.4% after announcing it was cutting 2,000 jobs.

The rising spectre of a downgrade of their AAA grade, or even a payment default, sent Treasury bond prices lower. The yield on the 10-year Treasury rose to 3% from 2.96% late on Friday, while the 30-year bond climbed to 4.32% from 4.26%. Bond prices and yields move in opposite directions.

AFP