GLOBAL MARKETS-Stocks, dollar fall as U.S. shutdown continues

* U.S. government shutdown enters 2nd day, no end in sight

* Surprisingly weak U.S. private jobs report extends losses

* Short-term U.S. debt default insurance costs rise

* Euro at 8-month high as ECB holds rates, Italian crisis eases

By Wanfeng Zhou

NEW YORK, Oct (KOSDAQ: 039200.KQ - news) 2 (Reuters) - Major stock markets and the dollar fell on Wednesday as a U.S. government shutdown entered a second day and data showed U.S. private employers added fewer jobs than expected last month.

Equities had risen on Tuesday on hopes the first partial shutdown of the U.S. government in 17 years would be short-lived. But with no end in sight to the funding battle in Congress that triggered it, concerns grew over the economic impact of the standoff.

Market volatility will likely increase the longer the shutdown continues. Investors are also watching the situation for an indication of how an impending debate on the debt ceiling might play out, considered far more important for the economy, as it could result in an unprecedented debt default if not passed.

"There's a sense that the debate isn't going to end soon. Yesterday's rally was driven by a hope this wouldn't last, but that hope is diminishing," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

Data showing U.S. private employers added 166,000 jobs in September, lower than forecasts of 180,000 jobs, added to investor jitters. The report has taken on added significance this week as the government shutdown means Friday's nonfarm payrolls report from the Labor Department may be delayed.

"If the numbers had come up really, really strong, perhaps people would overlook the problems in Washington. But with the numbers coming in slightly below expectations, it renews concern that the recovery could start to peter out," said Rick Meckler, president of hedge fund LibertyView Capital Management LLC.

MSCI (NYSE: MSCI - news) 's world equity index, which tracks shares in 45 countries, fell 0.6 percent to 382.32 after gaining 0.7 percent in the previous session.

The Dow Jones industrial average dropped 131.10 points, or 0.86 percent, at 15,060.60. The Standard & Poor's 500 Index was down 12.54 points, or 0.74 percent, at 1,682.46. The Nasdaq Composite Index was down 18.08 points, or 0.47 percent, at 3,799.90.

The dollar extended its losses from the previous day on expectations the shutdown will further delay the Federal Reserve's plans to scale back its asset-purchase program.

The dollar index, which tracks the greenback against a basket of six major currencies, fell as low as 79.781, its lowest since February.

Safe-haven U.S. government debt rose. The benchmark 10-year U.S. Treasury note was up 14/32, the yield at 2.599 percent.

The cost of insuring U.S. government bonds against default for the next year also rose, gaining five basis points to raise the cost of protecting $10 million of debt to $35,000 - the highest since Aug. 31 and above the rate for 5-year insurance.

Usually it costs more to buy longer-term default insurance so the current level is considered a classic sign of credit stress, reflecting the concerns over whether the United States will be able to raise the debt limit in coming weeks.

The euro rose 0.4 percent to $1.3582, after having hit $1.3606, its highest since February. The European Central Bank left interest rates unchanged, holding off any fresh policy action for now while it waits to see whether a fragile euro zone recovery strengthens.

A confidence vote for Italian Prime Minister Enrico Letta's government, ending fears that the euro zone's third-largest economy would be forced into fresh elections, added to the currency's appeal.

Italian shares and bonds both rose as it become clear former Prime Minister Silvio Berlusconi would drop his attempts to bring down the government, sending Milan's FTSE MIB (Milan: FTSEMIB.MI - news) share index up as much as 1.8 percent

Gold rose after a 3 percent fall in the previous session to a two-month low as the dollar weakened. Spot gold last traded at $1,312 an ounce, up from previous day's $1,285 an ounce.

Brent crude for November (Xetra: A0Z24E - news) rose 16 cents to $108.10 a barrel. U.S. crude traded around $103, up 96 cents.