European stocks steady, euro rallies on US shutdown

European stock markets were mixed on Tuesday as investors reacted to a rare US government shutdown and unease across the eurozone.

The euro hit the highest point against the dollar in 8 and-a-half months before pulling back slightly.

London's benchmark FTSE 100 index fell 0.21 percent to 6,448.95 points approaching midday in the British capital.

The CAC 40 in Paris climbed 0.73 percent to 4,173.85 points and Frankfurt's DAX 30 grew 0.59 percent to 8,645.34.

"It would appear that the markets either aren't overly bothered by Congresses inability to avoid a government shutdown, or aren't particularly surprised," said analysts from the Alpari trading group.

Asian stock markets diverged Tuesday after political gridlock in Washington triggered the first US government shutdown in 17 years, while upbeat regional economic data provided some cheer, traders said.

The dollar edged back down against the yen, with investors saying the Capitol Hill stand-off made it less likely the Federal Reserve would start winding down its stimulus programme soon.

The US government shut down at midnight Washington time (0400 GMT) as Republicans and Democrats refused to give ground to reach a budget deal.

World markets had expected the deadline to pass with no breakthrough and shares had fallen in previous sessions.

The US closure will see about 800,000 federal staff told to stay at home, leading to the closure of numerous agencies in the first shutdown since 1996 that President Barack Obama warned will hit a budding recovery in the world's biggest economy.

More eurozone strains

Traders were reacting also to news of an unexpected jump to unemployment in Germany, Europe's top economy.

German unemployment registered a surprising rise in September, due to a scaling back of job creation schemes, but the labour market overall remains in good shape, data showed on Tuesday.

The number of people registered as unemployed in the eurozone's top economy rose by 25,000 to 2.975 million in seasonally adjusted terms last month, the Federal Labour Office said in a statement.

Analysts had been expecting a drop of around 5,000.

Overall, eurozone unemployment dropped for the first time in more than two years to 12.0 percent in July against 12.1 percent the previous month, and then remained stable in August, data showed.

Ahead of the unemployment release, the euro hit $1.3588 -- the highest point since early 2013. It later stood at $1.3545, which compared with $1.3524 late on Monday.

The dollar fell to 97.78 yen from 98.21 on Monday.

"The euro has been a beneficiary of dollar weakness to some extent but has been held back by ongoing political instability in Italy," said Currencies Direct dealer Phil McHugh.

Once loyal supporters of Italy's Silvio Berlusconi spoke out against him Tuesday as Prime Minister Enrico Letta worked to shore up support on the eve of a crucial confidence vote in parliament

Investors appeared increasingly confident that Letta's government would not fall, with Milan's FTSE Mib stocks index rebounding 0.93 percent on Tuesday after closing 1.2 percent lower on Monday.

Italy's borrowing costs on 10-year-government bonds however rose to 4.580 percent from 4.431 percent on Monday after analysts warned Italy's fiscal targets for the year could be at risk.

The 77-year-old Berlusconi on Saturday announced he was withdrawing his party's five ministers from the fragile coalition presided by Letta, who said it was a "crazy and irresponsible" act.

Unilever warning

On the corporate front, Anglo-Dutch food and cosmetics giant Unilever, seen as a bellwether for global consumer spending, warned on Tuesday of slowdown in sales growth brought on by weakened demand in emerging markets.

Its share price slumped 3.54 percent to 2,354 pence in reaction.

Elsewhere, the price of gold rose to $1,332.25 an ounce from $1,326.50 Monday on the London Bullion Market.