World shares retreated from 17-month highs and commodities fell on Thursday as talks to avert a U.S. fiscal crisis stalled, reigniting fears over the health of the world's largest economy.

On the currency market, the yen firmed against the dollar and the euro following the Bank of Japan's widely expected decision to ease monetary policy for the third time in four months as it tries to reverse stubborn deflation.

But with trading winding down ahead of the holiday season and following weeks of strong gains in many risk asset markets, many investors seemed ready to use the setback in ending the saga of Washington's budget deadlock to close out positions.

"We're opening in the red this morning because of the failure to come to any concrete deal on the 'fiscal cliff'," said Central Markets senior broker Joe Neighbour.

"If there are profits to be had, we'll be looking to take them off the table."

London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX all opened down as much as 0.3 percent, while the FTSE Eurofirst 300 index <.FTEU3> of top European shares slipped 0.2 percent from a 19-month high set on Wednesday.

A weaker Wall Street start was suggested by a 0.3 percent drop in U.S. stock futures.

MSCI's world equity index <.MIWD00000PUS>, which has steadily risen over the past five weeks on optimism over the outlook for 2013, was down 0.1 percent at 341.7 points

The political wrangling over narrowing the budget deficit gap in Washington is needed to avoid a package of mandatory spending cuts and tax rises set for January that would throw the economy back into recession. No progress was made on Wednesday.

The tension was expected to rise later on Thursday when the Republican Party leadership plans to try to pass a bill of its own in Congress in a move which has already angered President Barack Obama.

The worries over the latest course of events have spread into the commodity markets, leaving gold near its 3-1/2-month low hit earlier in the week at around $1,670 an ounce.

London copper hit a three-week low, slipping by 0.5 percent to $7,885 a tonne. That extended losses in the previous session, when prices had dropped by more than 1 percent.

While U.S. crude fell 0.5 percent to $89.54 a barrel and Brent fell 0.4 percent to $109.94

In the currency markets, the Bank of Japan's latest policy move was the main driver of prices.

On top of expanding its asset-buying programme, the BOJ said it would review its guidelines for medium- and long-term price stability at its next policy-setting meeting in January - a signal that further easing was to come.

The dollar fell 0.45 percent to 84.00 yen on the decision, after hitting a 20-month high of 84.62 yen on Wednesday in anticipation of aggressive easing by the Japanese central bank. The euro also slid 0.45 percent on Thursday to be at 111.32 yen retreating from a 16-month high.

However, the dollar edged up 0.1 percent against a basket of major currencies .

(Additional reporting by Sudip Kar-Gupta; Editing by Alastair Macdonald)