* Gold consolidates gains after hitting a record this week *
Asian equities slipped on Friday as investors braced for more volatility after lawmakers failed to make progress in breaking a deadlock over raising the debt ceiling and avoiding a default.
The euro tumbled after Moody's rating agency said it placed Spain's "AA2" credit rating on review for possible downgrade, aggravating euro debt worries especially after Italy sold 10-year bonds at the highest yields in 11 years on Thursday.
Urgent efforts to avoid an unprecedented debt default hit yet another snag when some rebel Republican lawmakers refused to back a budget deficit plan proposed by their own congressional leaders, who put off a vote scheduled for Thursday night.
U.S. stock futures which fell as much as one percent after the news, recovered somewhat to be down as much as 0.6% on the day, pointing to a weaker start on Wall Street.
Leading European indexes are expected to fall in opening trades, with financial spreadbetters expecting major markets to open between 1.2 to 1.4% lower.
The euro last traded down 0.3% at $1.4286, close to an intraday low of $1.4281. The dollar fell to a four-month low of 77.50 versus the Japanese yen.
In a sign that investors are reducing bets before the weekend, commodity currencies like the Australian dollar which have been an investor favorite in this volatile period fell back from a 29-year high of 1.1080 hit earlier this week.
While investors believe that a ratings downgrade is unlikely to lead to a stampede out of U.S. bonds — given their dominance in the world of high-grade debt — markets may be in for a choppy ride as money managers assess the impact of such a move on their portfolios.
Erik Ristuben, chief investment officer for client investment strategies with Russell Investments said in a call that a U.S. downgrade would "bring an emotional response" in equity markets and the 10-year Treasury yield could rise as much as 50 basis points but then come back down over time.
Given the paucity of enough high quality assets in other countries, there would not be a full-fledged flight out of U.S. Treasuries, Ristuben, who helps handle over $163 bln in assets said.
For now, equities buckled under some broad profit-taking.
The MSCI index of Asia Pacific stocks outside Japan extended losses to nearly 1% after the announcement, from a drop of 0.2% earlier. For the week it is down about 1.5%.
Even Indonesia and Taiwan — some markets within the region which have held up relatively better than its peers so far this year — led declines with losses of a percent each.
MAKE LEHMAN LOOK LIKE A TEA PARTY
Strategists like John Woods, chief investment strategist at Citi Private bank echo the broad consensus view that a last minute deal will be reached to avert the U.S. debt default with an insufficient long-term plan the most likely solution.
"But should a default occur, it will make Lehman look like a tea party," Woods told Reuters Television referring to the aftermath of the bankruptcy of Lehman Brothers which sent global financial markets in a tailspin.
Despite worries about a looming U.S. default, Treasuries benefited from the spike in worries about euro zone assets, with yields on ten-year notes stabilising at 2.95%, below this week's high of around 3%.
Gold consolidated gains after rising by about 10% this month to a record near $1,630 per ounce on Wednesday.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust , said its holdings rose 1.5% to 1262.98 tonnes by July 28, from 1244.80 tonnes on July 27.
U.S. crude oil futures eased to $97.10 a barrel, while Brent crude futures were little changed around $117.50.
