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Impasse over US debt limit sends stocks lower

The Dow closed about 88 points down, the S&P 500 lost about 7 points, and the Nasdaq fell about 16 points

In this July 22, 2011 photo, Joseph Mastrolia, a trader for Barclays Capital, monitors stock information at his booth on the floor of the New York Stock Exchange. Global stocks started the week on a flat note Monday, July 25, 2011 as investors waited to see if U.S. political leaders can reach a deal to raise Washington's debt limit and avoid a default that would send shock waves through the global economy and financial markets.

Bebeto Matthews / AP

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NEW YORK (AP) — The debt showdown in Washington is rattling the stock market again.

Stocks fell Monday after Republican and Democratic leaders offered competing proposals to avoid a catastrophic default on the U.S. government's debt.

Lawmakers hoped to reach a compromise on raising the country's borrowing limit late Sunday, but those talks stalled. President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.

If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.

Most traders expect the White House and Capitol Hill to come up with a last-minute deal. Yet there are still uncertainties about higher taxes or changes to government spending that could affect corporate profits. Investors also worry that the government may only come up with a short-term fix that could still trigger a credit rating downgrade.

"We're thinking this is going to be resolved," said Rob Lutts, president and chief investment officer of Cabot Money Management. "The question: Is it resolved from a standpoint of a long-term solution or a stop-gap measure?"

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