UK feels heat as politicians squabble over US debt deal

The FTSE 100 share index was down 1.4 per cent at one point, but recovered slightly later on yesterday.

Investor confidence was further hit by information showing the American economy had grown less than expected in recent months.

Lloyds Banking Group led the market even lower, with a 4 per cent drop in its share value, driven in part by a broker downgrade by Royal Bank of Scotland from "buy" to "hold".

RBS, in a note on Lloyds, said: "Given what looks to us like an over-ambitious top-line strategy, a tough economic backdrop, regulatory uncertainty and limited repatriation of capital until 2015, we see little potential for the shares to achieve a sustainable re-rating in the next 12 months."

The US is locked in an ideological battle between the Republican-led House of Representatives and Democratic-led Senate.

Both sides have pushed ahead with rival measures to avert a US default next week, with neither prepared to end the political stand-off.

The leading Republican in the House, speaker John Boehner, hastily reworked his proposal to cut spending and raise the government's borrowing authority after opposition from his party's most conservative members forced him to postpone votes twice in two days.

Mr Boehner planned to try for another vote late yesterday. Even if it passed, it is likely to be doomed in the Senate.

The Senate's Democratic leader, Harry Reid, signalled he would push ahead with his own plan but that has little chance of passing the House.

The bills, though, could provide the basis for behind-the-scenes talks by congressional leaders aimed at finding a bipartisan compromise that could win approval in both chambers before Tuesday's deadline.

If they fail, the government would run out of money after Tuesday. Lacking the authority to take on more debt, it would be unable to pay some of its obligations. A default would lower the US credit rating, which would have a ripple effect on the global economy and send interest rates soaring.

President Barack Obama warned yesterday that "we're almost out of time".

"The power to solve this is in our hands on a day when we've been reminded how fragile the economy already is," he said from the White House.

"This is one burden we can lift ourselves. We can end it with a simple vote."

In the House, Republican leaders met behind closed doors with members in a last-ditch appeal. In the Senate, Mr Reid prepared for a showdown vote tomorrow.

He said he had invited Senate Republican leader Mitch McConnell to join him in negotiations.

"I know the Senate compromise bill Democrats have offered is not perfect in Republicans' eyes.Nor is it perfect for Democrats," Mr Reid said. "But together, we must make it work for all of us. It is the only option."

Mr McConnell dismissed the Democratic effort, arguing that it stands no chance in the Republican-controlled House, and he accused Mr Obama of pushing the nation to the brink of an economic abyss.