European shares hit four-week low as U.S. standoff drags on

By Blaise Robinson

PARIS (Reuters) - European stocks dropped in early trade on Monday, with one benchmark index hitting a four-week low, as the lack of progress in resolving Washington's budget standoff kept investors on edge.

Shares in luxury goods makers were among the heaviest fallers after Burberry's CEO was quoted in French daily Les Echos as saying that the slowdown in luxury goods sales in China may constitute a new market trend.

Burberry was down 2 percent, while France's LVMH was down 1.8 percent, and Swiss watch maker Richemont lost 1.5 percent.

At 0729 GMT, the FTSEurofirst 300 index of top European shares was down 1 percent at 1,231.25 points, a level not seen since September 10. The benchmark index broke below its 50-day moving average of 1,232.47, which had been an important support line.

The euro zone's blue-chip Euro STOXX 50 index was down 1.2 percent, at 2,892.78 points.

U.S. Democrats and Republicans came no closer on Sunday to a budget agreement that would end a government shutdown, let alone reaching a deal on the U.S. borrowing limit by October 17 to avoid an unprecedented default.

Republican House Speaker John Boehner said he would not raise the debt ceiling without a "serious conversation" about what is driving the debt. Democrats said it was irresponsible and reckless to raise the possibility of a default.

"The strong optimism seen just a week ago is eroding, and investors are getting nervous, with all eyes on Washington, at least until Alcoa's earnings," said Guillaume Dumans, co-head of research firm 2Bremans.

Around Europe, UK's FTSE 100 index was down 0.9 percent, Germany's DAX index down 1.2 percent and France's CAC 40 down 1.4 percent.

A number of traders in the market, however, still expect Washington to reach a deal, which would spark a recovery rally in the market.

"We're going to wobble our way down until about Thursday and then there's going to be a solution and there will be a melt-up," said Justin Haque, a broker at Hobart Capital Markets.

Bucking the trend, shares in Banca Monte dei Paschi di Siena rose 4 percent after the Italian lender said it would hold a board meeting on Monday to approve a new restructuring plan aimed at gaining a green light from European authorities for a state bailout it was granted earlier this year.

(Additional reporting by Francesco Canepa in London; Editing by Hugh Lawson)