GLOBAL MARKETS-Shares, dollar jolted by US, Italian politics, China disappoints

* US stock futures, dollar hit as government closure nears

* Euro pressured by its own political problems as Italy govt teeters

* Asian shares dragged lower, China factory survey disappoints

By Wayne Cole

SYDNEY, Sept 30 (Reuters) - U.S. stock futures and the dollar came under pressure on Monday as a shutdown of the U.S. government seemed ever more likely, while the euro had political troubles of its own as the Italian government teetered on the edge of collapse.

Hardly helping was a surprise downward revision to activity in China's factory sector. While the final HSBC Purchasing Managers' Index (PMI) did edge up to 50.2 in September, that was well down on the preliminary reading of 51.2.

The end result was a shift out of equities and toward safe havens including the yen, Swiss franc and some sovereign debt. U.S. Treasuries also benefited from a view that the economic damage done by a government closure would be yet another reason for the Federal Reserve to keep interest rates low for longer.

"Weekend political dynamics in the U.S. and Italy are likely to keep markets on the defensive at the start of a busy week for data and policy events," Barclays analysts wrote in a note.

The damage was clear in U.S. stock futures, where the S&P 500 contract shed 0.7 percent, as did the E-MINI S&P . In Europe, spread betters predicted markets in the UK, France and Germany would start with losses of up to 1 percent.

Asian stocks bore the early brunt, with MSCI's broadest index of shares outside Japan down 1.2 percent at a two-week low. Still, it gained 5.7 percent for the month of September, on track for its best month since January 2012.

Japan's Nikkei fell 1.5 percent on Monday and South Korean shares lost 0.6 percent. Australia's main index slid 1.4 percent from five-year highs, their biggest one-day drop since early August.

The air of risk aversion lifted the yen across the board. The dollar fell to 97.89 yen from 98.20 late in New York on Friday, while the euro hit 132.10 yen from 132.78.

The euro lost ground to the Swiss franc, hitting its lowest since early May at one point. Against the U.S. dollar, it was off a quarter of a cent at $1.3496.

The tension also took a toll on emerging market currencies, with the Indonesian rupiah and Malaysian ringgit both weakening.

The losses came as Italian Prime Minister Enrico Letta said he would go before parliament on Wednesday for a confidence vote after ministers in Silvio Berlusconi's centre-right party pulled out of his government at the weekend.

Letta said he wanted to avoid elections under the current widely criticised voting system which he said would produce more stalemate, but it was not clear if an alternative majority could be found.

Meanwhile in Washington, it seemed increasingly unlikely that Republicans and Democrats could reach a deal on funding the government before the fiscal year ends at midnight on Monday.

If so, many government employees will be furloughed and the Labor Department will not issue its monthly employment report scheduled for Friday.

It would also set the stage for a far-more consequential fight to raise the federal government's borrowing authority. Failure to raise the $16.7 trillion debt ceiling by mid-October might force the United States to default on some payment obligations - an event that could cripple the economy and send shockwaves around the globe.

Markets have always assumed it would never actually come to default, given the grave repercussions. Indeed, U.S. government debt still seemed to be considered a safe haven with 10-year Treasury yields falling 3 basis points to a seven-week low at 2.59 percent.

Investors also bid up Eurodollar futures on expectations that a drawn-out government shutdown and brinkmanship over the debt ceiling would keep the Fed from tapering its asset buying anytime soon.

The political bickering overshadowed data from Japan showing manufacturing activity expanded in September at the fastest pace since the earthquake and nuclear disaster of early 2011.

In commodity markets, gold was a shade firmer at $1,338.54 an ounce. Copper futures dipped 0.2 percent, but the metal was still on track for its biggest quarterly gain since March 2012 thanks to steadying global growth.

Diplomatic progress between the U.S. and Iran dragged Brent oil for November down 88 cents to $107.75 a barrel, while NYMEX crude lost $1.29 to $101.58.

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Italian lawmakers delay showdown over Berlusconi

1 of 2. People of Liberty party (PDL) leader Silvio Berlusconi talks with reporters as he signs a referendum on justice reforms and human rights in downtown Rome August 31, 2013.

Credit: Reuters/Remo Casilli

By Roberto Landucci

ROME | Tue Sep 10, 2013 6:45pm EDT

ROME (Reuters) - Italian lawmakers on Tuesday pulled back from a showdown over the political future of Silvio Berlusconi after allies of the billionaire media tycoon threatened to bring down Prime Minister Enrico Letta's unstable ruling coalition.

A meeting of a cross-party Senate committee charged with deciding whether Berlusconi should be barred from the Senate following a conviction for tax fraud ended without holding a vote, easing political tensions at least for the time being.

The center-left Democratic Party (PD), which has the largest presence on the 23-member committee, accepted center-right demands to slow down hearings on the case, but it maintains its position that Berlusconi must lose his seat.

The meeting ended at around midnight (6 p.m. ET). Hearings will resume on Thursday at 9 a.m. ET, Senator Benedetto Della Vedova of Mario Monti's Civic Choice said.

"The discussion will start again in the next few days and it will take a long time," the Senate group of the anti-establishment 5-Star Movement, which is most hostile to Berlusconi, said in a tweet as the meeting neared its end.

After a tense day in which center-right leaders threatened to pull out of Letta's coalition, potentially triggering snap elections, a sign of reduced hostilities came when Berlusconi called off a meeting with his lawmakers scheduled for Wednesday.

Many observers had expected that meeting to sanction the end of the Letta government if the center-left had maintained the uncompromising stance it had shown at an initial committee meeting on Monday.

Berlusconi's center-right People of Freedom (PDL) party has sought to halt the hearings pending an appeal to the European Court of Human Rights but has been rebuffed by the center-left which says the appeal is no more than a delaying tactic.

Whether the PDL's repeated threats to bring down the government go beyond simple brinkmanship remains unclear but the wrangling around the hearings has underlined how entwined Italy's political stability remains with the personal fate of Berlusconi, 20 years after he first entered politics.

At Tuesday's meeting the center-right agreed to drop a series of technical objections to try to halt the hearings on the agreement that each of the committee members could speak at greater length in a broad discussion on the merits of the case.

Ahead of Tuesday's hearing arguments had raged between the main partners in the cross-party coalition led by Letta, who comes from the PD, with each side accusing the other of creating a crisis.

With Italy straining to contain its 2 trillion euro public debt, the Berlusconi imbroglio has also hobbled efforts to reform the euro zone's third-largest economy, causing worries that extend well beyond its own borders.

Berlusconi, convicted by Italy's top court last month of being at the center of a vast tax fraud conspiracy at his Mediaset television empire, could not be expelled without a full vote on the floor of the upper house.

But he in any case faces banishment from front-line politics for at least a year after the court sentenced him to a four-year jail term that was then commuted to one year under house arrest or in community service.

BOND MARKET NERVES

Whether a government crisis would necessarily lead to new elections is unclear, given President Giorgio Napolitano's reluctance to send Italy back to the polls.

If the PDL eventually makes good on its threats, Napolitano could try to oversee the creation of a new government formed around the PD with the support of dissidents from the center-right or 5-Star party.

Berlusconi's own party remains divided between hawks pressing for a showdown with the PD and more moderate elements and executives from his business empire who fear that the party risks isolating itself with no guaranteed payoff.

With the European Central Bank pledging to step in to prevent bond market turmoil of the kind which threatened Italy at the height of the euro zone debt crisis in 2011, financial markets have shown no signs of panic.

But Italy's borrowing costs have crept up over the past few weeks and an auction of mid-term bonds on Thursday will be closely watched for any signs of investor nerves.

On Tuesday, Spanish government bond yields fell below Italy's for the first time in 18 months as worries over the political standoff hit sentiment.

Although there have been faint signs of improvement after some two years of recession, data on Tuesday showed the economy still far from recovery.

(Additional reporting by Paolo Biondi, James Mackenzie and Gavin Jones; Writing by James Mackenzie and Gavn Jones Editing by Ralph Boulton and Eric Walsh)

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