Equity markets in Asia were down between 0.6 percent to 1 percent, and U.S. stock futures fell 0.9 percent SPc1, while the benchmark 10-year U.S. Treasury yield rose four basis points to 3 percent.
Investors have been whipsawed in the past few months by hope and disappointment over policymakers' ability to halt sovereign debt crises in the euro zone and the United States.
The focus was squarely on Washington now after European leaders scraped together a second bailout for Greece last week.
Republicans and Democrats in the U.S. Congress were each trying to put together their own plan after talks with President Barack Obama broke down over the weekend, heightening fears of a catastrophic U.S. debt default that could roil the global economy.
Investors still mostly viewed the headlines coming out of Washington as political theatre and expected an eleventh-hour solution before an Aug. 2 deadline when the U.S. Treasury said it would not be able to borrow any more funds.
"Despite the ever-frustrating horse-wrangling between the Democrats and Republicans, which could result in a downgrade of the U.S. government debt ranking, I still believe that some kind of temporary deal will be struck in the last minute," said Khiem Do, head of Asian Multi-Asset with Baring Asset Management in Hong Kong.
"Overall, we remain positive on the solid economic and investment outlook for Asia, which may actually be considered as the 'safe haven' while the debt concerns and consumer de-leveraging in Japan, Europe and the U.S. continue," Do said.
Japan's Nikkei share average fell 0.6 percent , led by shares of clothing chain company Fast Retailing that were down 1.5 percent after hitting a 13-month high last Friday. Read Asian stocks Market july 25 2011
The MSCI index of Asia Pacific stocks outside Japan was down 0.5 percent , with industrials and commodity-related stocks underperforming the most.
The Swiss franc was the biggest gainer among the G10 major currencies, owing to its safe haven status.
"The fact that they seem to be jumping from one type of proposal to another and not converging on anything is beginning to worry markets," said Steven Englander, head of G10 FX strategy at Citigroup in New York.
economic and investment outlook for Asia, US debt crisis, downgrade of the U.S. government debt ranking, U.S. debt default on dollar, impact U.S debt ceiling on stock market
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