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Although equities rose on Tuesday on hopes the first partial shutdown of the US government in 17 years would be short-lived, one day later concerns about the economic impact grew as no signs emerged of an end to the budget standoff in Washington.
Market volatility will likely increase the longer the shutdown persists. Investors are also looking for an indication of how negotiations play out over the looming need to raise the US government's debt ceiling. The ceiling is far more important than the shutdown, as it could lead to an unprecedented default by the United States, though that is considered unlikely.
"Before the consensus was that any shutdown would be short-lived. But the positions have hardened over the last few days," said Susanna Gibbons, a portfolio manager at RBC Global Asset Management in Minneapolis. "Some increased volatility for the next couple of weeks would not be surprising."
Data showing US private employers added 166,000 jobs in September, below forecasts for 180,000 new jobs, added to investor jitters. The private-sector report has taken on added significance this week because the government shutdown means that the monthly payrolls report due on Friday from the Labor Department may be delayed.
"If the numbers had come up really, really strong, perhaps people would overlook the problems in Washington. But with the numbers coming in slightly below expectations, it renews concern that the recovery could start to peter out," said Rick Meckler, president of hedge fund LibertyView Capital Management LLC in Jersey City, New Jersey.
MSCI's world equity index, which tracks shares in 45 countries, fell 0.13% to 384.12 points, one day after gaining 0.7%.
The Dow Jones industrial average was down 58.56 points, or 0.39%, at 15,133.14. The Standard & Poor's 500 Index was down 1.13 points, or 0.07%, at 1,693.87. The Nasdaq Composite Index was down 2.96 points, or 0.08%, at 3,815.02.
In Europe, the FTSEurofirst 300 index of top regional shares ended 0.7% lower at 1,247.14, while the euro zone's blue-chip Euro STOXX 50 index was down 0.5% at 2,918.31.
The dollar fell on expectations the shutdown will further delay the Federal Reserve's plans to scale back its asset-purchase program.
The head of the Federal Reserve Bank of Boston, Eric Rosengren, said the government shutdown could further delay cuts to the bond-purchase program because of the lack of official data on the economy.
The dollar index, which tracks the greenback against six major currencies, fell as low as 79.781, its lowest level since February. It was last trading at 79.89, down 0.31%.
Safe-haven US government debt prices rose. The benchmark 10-year US Treasury note rose 7/32 in price to yield 2.6227%.
The cost of insuring US government bonds against default for the next year also rose, bringing the cost of protecting $10 million of debt to $35,500 - the highest since August 31 and above the rate for five-year insurance.
Because it usually costs more to buy longer-term default insurance, the current level is considered a classic sign of credit stress, reflecting concerns over whether the United States will be able to raise the federal government's debt limit in coming weeks.
The euro rose 0.44% to $1.3584, after having hit $1.3606, its highest level since February. The European Central Bank left interest rates unchanged, holding off any fresh policy action while it waits to see whether the fragile euro zone recovery strengthens.
A confidence vote for Italian Prime Minister Enrico Letta's government ended fears that the euro zone's third-largest economy would be forced into new elections, adding to the currency's appeal.
Italian shares and bonds both rose as it become clear that former Prime Minister Silvio Berlusconi would drop his attempts to bring down the government, sending Milan's FTSE MIB share index up as much as 1.8%, before closing 0.7% higher.
US crude futures led the oil complex higher following a report that construction of Trans-Canada's Gulf Coast pipeline would be completed by the end of the month.
Brent crude for November rose $1.25 to settle at $109.19 a barrel. US crude settled $2.06 higher at $104.10 a barrel.
