World markets steadied in the face of America's first partial government shutdown in nearly 20 years, but the pound surged to a year high against the battered US dollar.
The greenback took a hit after Congress and the White House failed to reach a deal to keep funding the administration after the current budget year ends, with sterling leaping to a new 10 month high of 1.62 dollars.
Up to 800,000 public service workers have been placed on temporary unpaid leave and all but non-essential government activities have been suspended as a result of the shutdown - the first since the winter of 1995-96.
Tourists were also hit as the move meant the closure of national parks, museums along the Washington Mall and US Capitol visitor centres.
The Dow Jones Industrial Average on Wall Street dropped nearly 130 points overnight after the White House and Republicans remained in deadlock past Monday's midnight deadline, stalling a temporary funding bill amid a disagreement over President Barack Obama's health care law.
Estimates suggested the shutdown could cost America's economy eight billion US dollars (£5 billion) a week, sending nervous investors heading for the exit across global markets yesterday.
But hopes of a speedy resolution helped European indices recover, with the FTSE 100 Index largely flat soon after opening and Germany's Dax and the Cac 40 in France in positive territory.
Joe Rundle, head of trading at ETX Capital, said: "The risk tone improves somewhat as investors take the view that a partial shutdown, if resolved quickly, will do little damage to the overall health of the US economy."
"That does however mean that we will need to hear the right sounds out of Washington to feel confident enough that the shutdown will not damage economic growth."
He added the political stalemate also boosted chances of the US Federal Reserve further pushing back plans to taper its massive economic stimulus drive, potentially until after 2013.
While the dollar was badly impacted by the shutdown, the price of oil also dropped sharply, falling below 102 US dollars a barrel in New York as it threatened to slow the economy and reduce demand in the world's largest oil consumer.
Added to the budget wrangling is the looming threat of a stand-off over the Federal debt ceiling, with the US at risk of defaulting on some of its payment obligations unless Congress agrees to raise the federal borrowing cap by mid-October.
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