Stocks dipped on Monday as lawmakers remained in a standoff over raising the debt ceiling to avoid default, but investors were convinced a compromise will be reached before next week's critical deadline.

Trading volume, however, was light even for a seasonally quiet period, suggesting investors were holding to the sidelines. In another sign of negative sentiment, declining stocks far outpaced advancers despite the day's moderate declines.

Lawmakers are facing an August 2 deadline to raise the $14.3 trillion debt ceiling to avert a U.S. default.

If you listen to all of the rhetoric and read all of the print, August 2 has the potential of being one of the worst days ever, if the debt ceiling isn't raised, said Hank Smith, chief investment officer at Haverford Trust Co. in Philadelphia.

But the market is not reacting as if that's going to happen, he said. Politicians are being politicians...but when they get to the end of the cliff, they're not going to jump. They will raise the debt ceiling.

A deal remained elusive in Washington as President Barack Obama's Democrats and their Republican rivals pushed for separate budget proposals in Congress, increasing the threat of a ratings downgrade and default that could sow chaos in global markets. For details, see [ID:nN1E76N0CA] A two-stage Republican plan would call for $1.2 trillion in cuts.

Investor anxiety remained high, reflected in the CBOE Volatility Index <.VIX>, which jumped 10.5 percent, its biggest percentage increase in two weeks.

The Dow Jones industrial average <.DJI> was down 88.36 points, or 0.70 percent, at 12,592.80. The Standard & Poor's 500 Index <.SPX> was down 7.59 points, or 0.56 percent, at 1,337.43. The Nasdaq Composite Index <.IXIC> was down 16.03 points, or 0.56 percent, at 2,842.80.

Among the weakest sectors were health care <.GSPA>, telecommunications <.GSPL> and consumer staples <.GSPS>, erasing some of last week's market gains notched on second-quarter earnings that were mostly stronger than expected. The S&P index of each sector was down at least 1 percent.

On the New York Stock Exchange, decliners outweighed advancers by about 4-to-1, while Nasdaq losers beat winners by about 10-to-3.

The political jousting in Washington pushed gold prices to record highs as the fear of a default raised the appeal of bullion versus the greenback. The dollar fell to a record low against the Swiss franc, a safe-haven currency.

There is concern about the implication about what our own debt rating will be as we air out this dirty laundry to try to come to a resolution, said Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.

Strong earnings reports have offset worries about the debt debate, helping stock indexes post gains last week. Of the 154 S&P 500 companies that have reported earnings so far, 75 percent have beaten analyst expectations, according to Thomson Reuters data.

But among Monday's results, Kimberly-Clark Corp declined 2.1 percent to $66.48 after it said 2011 profits may be at the low end of its forecast.

Another disappointment came from hospital operator HCA Holdings Inc , which reported quarterly profit and revenue that were short of expectations, spooking investors who feared it indicated the start of a trend.

Other big decliners for the day included U.S.-listed shares of Research In Motion Ltd , which were off 4.4 percent at $26.67 after the BlackBerry maker decided to cut about 11 percent of its work force as it struggles to compete against Apple Inc and Google Inc .

Trading volume on the New York Stock Exchange, NYSE Amex and Nasdaq was at 5.89 billion, well below the daily average of 7.49 billion.

(Reporting by Caroline Valetkevitch; additional reporting by Ashley Lau; Editing by Leslie Adler)

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