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Stocks drift as traders eye U.S. budget battle

LONDON World stocks mostly drifted lower on Friday as investors worried that U.S. politicians might not agree on a budget needed to avoid a shutdown of the government.

The government will reach its borrowing limit, or debt ceiling, on Tuesday. If Congress doesn't raise that limit, the government won't be able to pay all its bills and some 800,000 of the 2.1 million federal employees will not go to work.

The White House and Republican lawmakers still disagree sharply on spending cuts and other key budget issues. The Senate plans to vote Friday on measure to prevent an immediate shutdown next week, but a lasting solution still seems far off.

"Tension will increase on the U.S. fiscal front as we approach the deadline of potential government shutdown and will likely act as a drag on sentiment," said Gary Yau, analyst at Credit Agricole CIB.

In early European trading, the FTSE 100 index of leading British companies dropped 0.9 percent to 6,508.05 while Germany's DAX retreated 0.3 percent to 8,634.12. France's CAC 40 dipped 0.3 percent to 4,174.79.

U.S stocks were poised to fall. Dow futures were down 0.3 percent to 15,212 while the broader S&P 500's futures shed 0.4 percent to 1,685.50.

Investors will later eye data on U.S. personal income and spending as well as the University of Michigan consumer confidence indicator. Figures this week on unemployment benefits had been upbeat, suggesting the Federal Reserve may begin to "taper" its monetary stimulus in coming months.

In Asia, Hong Kong's Hang Seng Index rose 0.3 percent to close at 23,207.04 while in mainland China, the Shanghai Composite Index advanced 0.2 percent to 2,160.03.

Markets in China were subdued ahead of the launch Sunday of a pilot free trade zone in Shanghai.

China's leaders have already loosened restrictions on foreign investment in the 11.2-square-mile zone. Further details are expected when the zone is inaugurated. Analysts say authorities are likely to relax taxes, trade quotas and administrative red tape in the zone.

A weeklong holiday in China that starts Tuesday and follows another three-day holiday just last week also kept some investors on the sidelines.

Japan's Nikkei 225 dipped 0.3 percent to 14,760.07 after the country's consumer price inflation rose at the fastest rate in five years in August.

South Korea's Kospi climbed 0.2 percent while Australia's S&P ASX 200 rose 0.2 percent. Benchmarks in New Zealand, Taiwan and Singapore also advanced but India's dropped.

In currencies, the euro strengthened 0.4 percent to $1.3540 while the dollar slipped 0.5 percent against the Japanese yen, to 98.47 yen. The British pound rose 0.4 percent to $1.6104 after the governor of the Bank of England said he saw no reason to have more monetary stimulus as the economy is improving.

In energy markets, benchmark oil for November delivery fell 33 cents to $102.70 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 37 cents to settle at $103.03 on Thursday.