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Setback in US budget talks sends stocks lower amid fears economy will fall over 'fiscal cliff'

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PARIS - Another failed attempt find a compromise in U.S. budget negotiations sent world stock markets plummeting Friday, as investors feared the world's largest economy could teeter into recession if no deal is found.

Without an agreement, the U.S. economy will fall off the so-called "fiscal cliff" on Jan. 1 when Bush-era tax cuts expire and spending cuts kick in automatically. The measures were designed to have a negative effect on the U.S. economy, in the hopes that feared outcome would push lawmakers and President Barack Obama to find a deal.

"We've seen Europe's politicians repeatedly flirt lemming-like with cliff-diving in 2012, and now it's the turn of U.S. 'leaders,'" said Kit Juckes, an analyst with Societe Generale. "The nagging fear is always there, that someone, on one side of the Atlantic or the other, will forget to let rational thought take over at the last second."

Amid the uncertainty, European shares fell. France's CAC dropped 0.7 per cent to 3,642, while the DAX in Germany dropped 0.9 per cent at 7,605. The FTSE index of leading British shares retreated 0.9 per cent to 5,908.

The euro also fell sharply, dropping 0.1 per cent to $1.3220.

In Asia, Japan's Nikkei 225 index closed 1 per cent lower at 9,940.06. Hong Kong's Hang Seng lost 0.7 per cent to 22,506.29. South Korea's Kospi shed 1 per cent at 1,980.42. Australia's S&P/ASX 200 fell 0.2 per cent to 4,623.60. Mainland Chinese stocks were mixed.

U.S. stock futures tumbled after rank-and-file Republican lawmakers failed to support an alternative tax plan by House Speaker John Boehner late Thursday in Washington. That plan would have allowed tax rates to rise on households earning $1 million and up. Obama wants the level to be $400,000.

Dow Jones futures dropped 1.5 per cent to 13,072, while Standard & Poor's futures fell 1.6 per cent at 1,418.

The two leaders have significantly narrowed their differences toward a compromise, but the latest setback leaves little left to find a deal.

"The fiscal cliff is a real threat not just for U.S. growth next year but for the outlook for global growth," said Jane Foley, currency analyst with Rabobank.

When growth slows, energy demand does, too, and oil prices fell in anticipation.

Benchmark crude for February delivery fell $1.29 cents to $88.84 per barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.

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