Stocks fell on Monday as continued political sparring in Washington over the debt ceiling heightened worries of a U.S. rating downgrade, sending world equities lower.

The Congress pursued rival budget plans that appeared unlikely to win broad support, pushing the country closer to a debt default and the loss of its coveted triple-A credit rating.

"This whole game of chicken is fraught with risk ... risk for everybody. Risk for the investors, for the consumer, to the economy, to Americans, to Europeans, risk across the board," said Ken Polcari, managing director at ICAP Equities in New York.

Still, analysts ultimately expected a deal by the August 2 deadline. "What the market is telling you is that although it thinks a deal is going to get done, it's going to wait and see what the ultimate deal is to decide whether the market likes it or not," Polcari said.

The Dow Jones industrial average <.DJI> dropped 63.58 points, or 0.50 percent, to 12,617.58. The Standard & Poor's 500 Index <.SPX> slipped 6.39 points, or 0.48 percent, to 1,338.63. The Nasdaq Composite Index <.IXIC> took off 12.65 points, or 0.44 percent, to 2,846.18.

Reflecting investor anxiety, the CBOE Volatility Index <.VIX> climbed nearly 10 percent, its biggest percentage increase in two weeks.

The MSCI world equity index <.MIWD00000PUS> fell 0.4 percent.

The uncertainty over the debt ceiling pushed gold prices to record highs as the fear of a default raised the appeal of the bullion versus the greenback. The dollar fell to a record low against the Swiss franc, while gold hit a new high.

In company news, U.S.-listed shares of Research In Motion Ltd were off 4 percent to $26.78 after the BlackBerry maker said it will cut about 11 percent of its workforce as it struggles to compete against Apple Inc and Google Inc .

Earnings continued to pour in. Kimberly-Clark Corp shed 1.6 percent to $66.82 after the maker of Kleenex tissues and Huggies diapers said 2011 profits may be at the low end of its forecast, even as second-quarter income topped expectations.

Through Monday morning, 154 S&P 500 companies reported quarterly results, with 75 percent topping estimates, according to Thomson Reuters data.

Also unsettling investors, credit rating agency Moody's cut Greece's sovereign debt by three notches to 'Ca', one level above default. Greece has the lowest rating of any country in the world covered by Moody's.

Volume was light with about 2.52 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, below the daily average of 7.44 billion.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

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