European stock markets dropped on Wednesday, as U.S. lawmakers took the deadlock over avoiding a disastrous default to the last hours before a deadline

Sentiment was rattled further as ratings agency Fitch placed the United States on warning for a downgrade from its top-level AAA assessment.

In late morning deals, London's FTSE 100 index dropped 0.41 percent to 6,522.07 points, Frankfurt's DAX 30 slid 0.12 percent to 8,793.27 points and the CAC 40 in Paris reversed 0.70 percent to 4,226.16 compared with Tuesday's closing values.

The United States on Wednesday stood hours from a fateful fiscal deadline, with a chaotic political standoff threatening to trigger a debt default and rock the global economy.

"Lawmakers in the U.S. have today to whack out a deal to lift the country?s borrowing limit," said ETX Capital analyst Ishaq Siddiqi.

"Many in the market expect an eleventh hour agreement to be announced, much like at the end of 2012 when politicians averted the fiscal cliff."

Hopes that Congress would agree to raise the government's borrowing authority as required by midnight (0400 Thursday) rested with last gasp talks in the Senate.

The European single currency meanwhile firmed to $1.3536, compared with $1.3525 late in New York on Tuesday.

"The eve of the deadline is failing to generate much excitement in the foreign exchange space," research director Kathleen Brooks told AFP.

"Volatility remains low because (there is) too much uncertainty to fuel a direction one way or the other."

She added: "There is still a potential for a deal to be struck, but no one wants to count their chickens just in case there is not."

Asian equities experienced mixed trading with all eyes on Washington, amid doubts over whether Congress would eventually reach an agreement to fund the government, dealers said.

Hong Kong stocks fell 0.46 percent, Shanghai dipped 1.81 percent and Seoul lost 0.31 percent, while Sydney closed flat and Tokyo rose 0.18 percent.

Wall Street had closed deep in the red on Tuesday as politicians in Washington remained deadlocked, with the Dow Jones Industrial Average shedding 0.87 percent to 15,168.01 points.

Any U.S. budget deal though would have to make it through the Republican-led House of Representatives, where conservative Tea Party lawmakers have thwarted previous compromise efforts in a bid to undermine Democratic President Barack Obama.

Fitch warns on 'brinkmanship'

If Congress does not raise the $16.7-trillion debt ceiling in time, the U.S. Treasury would begin to run out of money to meet all U.S. obligations and slip towards a historic default.

Economists have warned that such an outcome would have devastating effects on the global economy and on world financial markets.

Fitch warned it would downgrade the U.S. debt rating from its highest level, citing the possibility the Treasury could default on its obligations.

"The U.S. authorities have not raised the federal debt ceiling in a timely manner," it said.

"Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default."

Efforts to end the U.S. debt showdown had collapsed Tuesday after an extreme Republican rump in the House of Representative refused to back a deal put forward by Speaker John Boehner. Another plan did not even get off the ground.

The proposals would have reopened the government after an October 1 shutdown as well as increase the country's borrowing limit until February 7.

The House and Senate now have little room to fashion an agreement before Thursday.

In France, a number of companies saw their shares fall sharply.

Stock in food group Danone fell by 3.85 percent in response to figures for the cost of a food recall in Asia.

PSA Peugeot Citroen shares fell by 4.76 percent on weak sales in September, LVMH luxury group stock fell 4.83 percent on disappointing quarterly sales, and Ubisoft stock plunged 26.24 percent on a delay in the launch of two new computer games.