Gold prices hit a record high at more than $1,623 an ounce and Asian stock markets were largely flat, as news out of Washington indicated politicians were making little progress in ending the deadlock over lifting the U.S. debt ceiling.

Republicans had to delay bringing a plan to a vote in the U.S. Congress because it was being rewritten, while an analyst at Standard & Poor's told CNBC that prioritising debt payments to avoid a default would be "deeply disruptive" to the economy.

Debt and inflation were globally the main focuses of investors.

The Australian dollar jumped to a post-float high above $1.1060 after second quarter inflation figures were higher than forecast, squeezing investors who had recently increased bets that the Australian central bank would cut rates this year.

The Australian dollar and other Asia-Pacific currencies have been rising as traders anticipate more policymaker action to keep quickening inflation and capital inflows at bay.

The threat of a U.S. default and a credit rating downgrade loomed over equity markets and the dollar, which was sold across the board on Tuesday, though a one-notch cut may not have a lasting impact on markets.

"The impact of a credit downgrade on the financial markets would be negative for growth. The induced shocks to the economy could lower next quarter's real GDP growth to close to zero. However, a likely rebound in Q4 growth, following a resolution of the budget debacle, could leave growth in the second half lower by 0.6 percent," said Michael Carey, North American chief economist with Credit Agricole, in a note.

DEBT POLITICS

The intense crisis over Washington's borrowing limit has not triggered persistent selloff in risky assets, especially since many investors see few alternatives to the depth of the U.S. Treasury market and contrast the political nature of the U.S. crisis with the structural problems in the euro zone.

Most market watchers expect some sort of last-minute deal in Washington. But the standoff has made investors increasingly hedge against an adverse outcome, particularly with the clock ticking toward an Aug. 2 deadline when the U.S. Treasury said it would not be able to borrow anymore.

Japan's Nikkei share average was down 0.7 percent , led by Honda Motor Co shares, which were down 1.7 percent in early trade.

The MSCI index of Asia Pacific stocks outside Japan was steady , while benchmark indexes in South Korea and Hong Kong were down slightly.

The U.S. dollar index , which gauges its value against a basket of six other major currencies, was largely unchanged on the day after earlier hitting a fresh 2-1/2-month low at 73.42.

The dollar hit a four-month low against the yen, just below 77.80 , though the march lower has been sluggish because of fears that Japan may step into markets unilaterally to slow its currency's gains.

Japanese policymakers are becoming alarmed at persistent yen rises and considering solo currency intervention as an increasingly viable option for the near term, sources with knowledge of the matter told Reuters on Tuesday.

The yield on the benchmark 10-year U.S. Treasury note was at 2.97 percent , up around 2 basis points from late Tuesday in New York. The yield has darted around 3 percent for the past week, with traders highly uncertain about the near term outlook.

Shorter-term securities reflect more of the unease among investors, with T-bills maturing in August are yielding 2 to 3 basis points more than debt coming due in September.

In commodity markets, gold climbed to an all-time high of $1,623.86 an ounce , having risen more than 14 percent so far this year, greatly exceeding the S&P 500 index's 6 percent gain so far.

"The same arguments about potential government bond fallout are still being made," said a Singapore-based trader, "but people are on the sidelines ahead of the August deadline waiting to see whether or not the U.S. is going to avoid a technical default."

U.S. crude oil futures CLc1 fell 45 cents to $99.14 a barrel, while Brent crude futures LCOc1 were little changed at $118.18. (Editing by Richard Borsuk)

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