GLOBAL MARKETS-Dollar, shares weak as US budget concerns weigh

* Possible US government shutdown, lack of Fed clarity weigh

* World shares hold near one-week low

* German consumer confidence hits 6-year high

* Oil above $109 as little thaw seen in US, Iran relations

By Richard Hubbard

LONDON, Sept 25 (Reuters) - The dollar fell and world shares held near a one-week low on Wednesday as concerns over a potential government shutdown in Washington and mixed signals on U.S. monetary policy kept investors on edge.

U.S. stock index futures point to a mixed open for Wall Street following four days of losses where the broad S&P 500 is on its longest losing streak since last month.

A vote is due in the U.S. Senate later on a motion that will allow the government to keep running beyond the end of the month when budgets are due to expire, though lawmakers have yet to find enough common ground to ensure its passage.

Investors, wrong-footed by last week's surprise decision by the Federal Reserve not to begin trimming its bond-buying stimulus, are also still debating the central bank's next steps and what mixed signals from policymakers say about the economy's health.

"We're not seeing a post-Fed party as perhaps the market was initially expecting, and that's causing some safe-haven flows," said Simon Smith, chief economist at FXPro.

The dollar had eased 0.2 percent to 98.50 yen from late U.S. levels on Tuesday and equally was down 0.2 percent against a basket of six major currencies.

The euro was firmer against the dollar at around the $1.35 level, supported by data showing German consumer confidence was running at a six-year high heading into October.

The MSCI world equity index, which tracks shares in 45 countries, was flat on the day though it remains about 1 percent below the highs reached in the rally which immediately followed last week's Fed decision.

European stocks had fallen 0.35 percent by midday, mirroring losses earlier in Asia, where MSCI (NYSE: MSCI - news) 's broadest index of Asian shares outside Japan slipped 0.2 percent.

Japan's Nikkei fell 0.8 percent despite news of Applied Materials Inc (NasdaqGS: AMAT - news) 's buyout of Tokyo Electron Ltd , bringing together two of the world's biggest computer chipmakers to create a company with a market value of $29 billion.

DEBT LIMIT

While concerns about the U.S. budget talks were foremost in keeping the dollar under pressure, traders were also focused on the looming talks on raising the government's borrowing limit, needed to avoid the risk of a debt default.

Any default would rock Wall Street and could even trigger another economic crisis in a nation still struggling to recover from the 2007-09 recession.

The last debt ceiling showdown in 2011 pushed the United States to within days of missing payments and led ratings agency Standard and Poor's to strip Washington of its triple-A credit rating.

"There is a deep reluctance to buy dollars until the picture around the debt ceiling becomes clearer," said Derek Halpenny, European head of global currency research.

U.S. Treasuries have reacted cautiously to the political developments, holding steady with the yield on the benchmark 10-year note at 2.65 percent, near a six-week low.

GERMAN CONFIDENCE

The upbeat German consumer confidence data backed up Tuesday's Ifo business morale survey in pointing to a steady recovery in the euro zone's biggest economy although recent weak industrial production numbers and a drop in exports have combined to leave a mixed picture overall.

Ten-year cash German yields fell 1 basis point to 1.79 percent, supported by comments from European Central Bank officials this week that the central bank stood ready to pump another round of money into banking markets if need be.

On commodity markets, steady buying from top consumer China pushed copper futures up 0.4 percent to $7,178.25, putting them on track to snap a three-session losing streak.

Gold rose 0.3 percent to $1,327.25 an ounce, extending Tuesday's gains, which had followed three sessions of losses.

Oil prices firmed against a backdrop of hopeful signals that long-standing tensions in the Middle East could be easing.

U.S. President Barack Obama on Tuesday cautiously embraced overtures from Iran's new president as the basis for a possible nuclear deal, but a failed effort to arrange a simple handshake between the two leaders underscored entrenched distrust that will be hard to overcome.

"There are some hopes there might be a gradual forging of a relationship between the West and Iran, though it's still early days," said Ric Spooner, chief market analyst at CMC Markets.

Front-month Brent crude for November (Xetra: A0Z24E - news) delivery rose about 0.85 percent to $109.57, while November U.S. crude added 0.5 percent to $103.63 a barrel.