By Dominic Lau

TOKYO (Reuters) - Asian stocks were pegged back on Friday, with Japanese shares hitting a near four-week low and the dollar languishing around an eight-month trough as the U.S. budget standoff dragged on, heightening fears it could have more serious repercussions for the world's largest economy.

Tokyo's Nikkei fell 0.4 percent in the morning session after shedding as much as 1.5 percent to its lowest since Sept 6, taking its cue from the U.S. S&P 500, which suffered its ninth loss in 11 sessions overnight.

"Market unease will likely remain while the fiscal struggle continues to dominate headlines, especially as the second, and more important, deadline of U.S. default gets closer," Credit Agricole said in a note to clients.

President Barack Obama met Republican and Democrat leaders in Congress but reiterated in a speech that he would not give in to Republican demands to roll back his healthcare programme in exchange for reopening the government.

The debt ceiling is far more important than a partial U.S. government shutdown, which began on Tuesday, since it could lead to an unprecedented default by the United States, an outcome the market assumes is unthinkable.

BNP Paribas analysts said it was increasingly possible that the standoff in Washington would continue until the debt ceiling deadline on October 17.

"Market reaction is likely to intensify going into that date however, with the dollar extending its slide versus yen, Swiss franc and the euro," they wrote in a note.

"The silver lining for the dollar is that it is already trading at a sizeable discount relative to short-term rates, suggesting that there will be plenty of scope for the dollar to rally on any positive outcome in Washington."

The shutdown has caused a delay in the release of the closely-watched nonfarm payrolls data, normally due out on Friday. The data is a key piece of information for the Federal Reserve to consider when deciding to scale back its stimulus.

Two senior Fed officials warned on Thursday of damaging consequences if the country defaults on its debt and said U.S. monetary policy is being kept easier to help offset the harm caused by the political wrangling in the Capitol Hill.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.1 percent. Seoul shares slipped 0.3 percent, though Samsung Electronics Co Ltd added 0.6 percent after the index heavyweight estimated its July-September earnings rose 25 percent to a record $9.4 billion.

The dollar was also hurt by slower growth in the U.S. services sector in September.


The euro was steady at $1.3630, not far from an eight-month high of $1.36465 touched on Thursday. The common currency was also aided by the European Central Bank's apparent lack of concern over the euro's recent strength and better-than-expected euro zone data.

"The euro has become an island of stability in global asset markets ... Peripheral yields are higher and more stable than in the U.S. and equity markets keep outperforming," Citigroup said in a report.

"However, we would emphasise the euro's rally as a function of improved capital market conditions, rather than fundamentals, and expect it will be fragile if these capital markets conditions change."

Against a basket of major currencies, the greenback was near an eight-month trough.

The dollar held at 97.19 yen, after hitting a five-week low of 96.93 on Thursday, as the Bank of Japan stood pat on monetary policy as expected.

The BOJ revised up its assessment on capital expenditure, encouraged by growing signs that the benefits of its stimulus policy are broadening.

Brent crude slipped 0.2 percent to around $108.8 a barrel, adding to a 0.2 percent decline overnight, as the slower service sector growth in September compounded worries about raw materials demand due to the U.S. budget crisis and government shutdown.

Copper prices stabilised after tumbling 1.3 percent on Thursday.

(Additional reporting by Ian Chua in Sydney; Editing by Richard Pullin, Eric Meijer and Shri Navaratnam)