U.S. futures were down and gold hit a fresh nominal high over fears that any deal on U.S. debt reduction will come too late for the United States to meet an Aug. 2 deadline to avoid defaulting on its debts, the Wall Street Journal said in a live blog of the day's market movements.
"With just days to go now before the Aug. 2 deadline, investors who had previously written the impasse off as political games are now going to seriously consider the possibility of a default," GFT Global Markets director of global dealing operations Martin Slaney told Dow Jones Newswires.
"No doubt there will be some midnight oil burnt between President Obama and Democrat leaders, but even were a deal to be cobbled together, the risk-reward of staying long at this late stage is evaporating."
Tokyo closed 0.81 percent lower, Seoul dropped 0.96 percent, Sydney a hefty 1.58 percent, and Hong Kong fell 0.7 percent.
The Shanghai market was hardest hit, losing 2.16 percent with the additional impact of infrastructure concerns following a fatal high-speed train crash on the weekend.
The dollar slumped it to its lowest level against the yen since Japan's devastating earthquake and tsunami in March.
In Europe, U.K. banks were sold off as London's FTSE 100 opened 0.6 percent lower at 5898.51. Frankfurt's DAX dropped 0.7 percent and Paris's CAC-40 lost 0.7 percent.
After weeks of agonizing talks, President Barack Obama has been unable to convince Republican leaders that a "grand bargain" on long-term deficit reduction must include tax increases on the rich as well as spending cuts for the poor.
The Republican majority in the lower House have said they will not agree to raise the limit on the country's debt, now totaling $14.3 trillion, to allow the government to service its debts without a deal on the deficit.
Economists including Federal Reserve Chairman Ben Bernanke have warned of catastrophic consequences for the world economy, and U.S. credit worthiness, in the event the world's richest economy defaults.
The stalemate only hardened over the weekend when chief Republican negotiator John Boehner refused to return Obama's telephone calls.
Despite Monday's market turmoil, many analysts still believe neither side will allow a default.
Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, told AFP: "With a week still to go, I think the general sentiment is that there could be many solutions. I expect a deal could be reached before August 2."