U.S. budget setback hits shares, euro

European and Asian shares weakened on Friday and both the euro and gold slipped, as a new setback in talks to avert a U.S. fiscal crisis stoked investor nerves.

A proposal from Republican leader John Boehner to avoid the so-called fiscal cliff failed to get support from his party on Thursday, casting fresh uncertainty over talks to avoid across-the-board tax hikes and spending cuts that could push the U.S. economy into recession in 2013.

The worries prompted selling in European shares as trading resumed, with the FTSEurofirst 300 <.FTEU3> index of the top European stocks down 0.4, albeit still on course for a fifth straight week of gains.

"The market is still too complacent and the odds are increasing that a (U.S. budget) deal will not get done in the immediate future," Saxo Bank Chief Economist Steen Jakobsen said.

"That leaves European equities (in terms of earnings multiples) vulnerable to the negative exposure of the fiscal drag and even a compromised deal is going to do very little to structurally reform anything," he added.

London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX were down 0.3-0.5 percent following a 0.7 percent tumble in Asian stocks <.MIAPJ0000PUS>, and futures prices pointed to sharp falls Wall Street later.

Anxiety was exacerbated by weaker-than-expected German data which showed consumer morale dropped for the fourth month running to its lowest level in more than a year.

The combined worries helped push up German government bonds and the dollar , both traditionally favored by risk adverse investors.

The euro eased back to just over $1.32, trimming some of the gains it has seen this week as euro zone sentiment continued to improve.

Gold was also caught up in the U.S. disappointment, slipping $1.38 to $1,645.76 an ounce, putting it near a four-month low and on track for its steepest weekly drop since June.

(Reporting by Marc Jones; editing by Philippa Fletcher)