Shares in New York fell sharply last night after the US Treasury warned that the budget fight between Republicans and Democrats in Washington risked plunging the world's biggest economy into its worst slump since the great depression.
Barack Obama turned up the pressure on Republicans after the Treasury and the International Monetary Fund joined senior Wall Street figures in urging a deal well ahead of the deadline for raising America's debt ceiling on 17 October.
"A default would be unprecedented and has the potential to be catastrophic," the Treasury reported.
"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."
The economy has struggled to recover from the recession of five years ago. A health check of the service sector showed a marked slowdown even before large parts of the federal government were shut down as a result of the failure to agree a budget deal.Obama accused the Tea Party wing of the Republicans of being extremists who were "demanding a ransom for doing their jobs". He added: "Congress has to pass a budget that funds our government with no partisan strings attached."
Anxiety in financial markets was reflected in a 136 point fall in the Dow Jones industrial average by the close.
Christine Lagarde, the IMF's managing director, urged America's politicians to settle their differences before the dispute harmed the entire global economy.
Speaking in advance of the fund's annual meeting in Washington next week, Lagarde said it was "mission critical" that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09. "The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy. So it is 'mission-critical' that this be resolved as soon as possible."
Lagarde's speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington.
The IMF managing director said America's recovery was being held back by over-hasty budget cuts.
"Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low - below 2% - due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher."
Lagarde said: "We at the IMF are very familiar with the ebb and flow of economic cycles . . . Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different.
"They will likely play out over the rest of the decade, if not longer."
(c) 2013 Guardian Newspapers Limited.
Original headline: Dow plunges amid fears of global slump
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