Some $85 billion in cuts are due to take effect today as part of a previous budget agreement between the White House and Congress. The planned "sequester" could hit U.S. growth if no deal is reached to avoid it. The International Monetary Fund has estimated that it could shave around 0.5 percentage point off U.S. growth this year.
Though relatively minor, certainly in comparison with what could have happened if U.S. lawmakers didn't cobble together a deal to avoid the so-called "fiscal cliff" of automatic spending cuts and tax rises at the end of 2012, the debate over the "sequester" has highlighted the scale of divisions in Congress.
"All we've seen in recent months is yet another sign that those in Congress are more concerned with their political agenda than doing what's best for the country," said Craig Erlam, market analyst at Alpari.
At the end of a week that's seen financial markets swing this way and that following the messy Italian election results and an indication from U.S. Federal Reserve chairman Ben Bernanke that the central bank was not planning to tweak its super-easy and super-cheap monetary policy anytime soon, stocks have been subdued especially after some disappointing economic data.
In Europe, British manufacturing figures came in worse than expected and unemployment in the 17-country euro area rose to 11.9 percent from 11.8 percent in December.
The FTSE 100 index of leading British shares was down 0.4 percent at 6,335.36, while Germany's DAX fell a full percent to 7,666.44. The CAC-40 in France fared even worse, falling 1.1 percent to 3,682.50Futures showed a similar trend for Wall Street, a day after the Dow Jones industrial average once again failed to breach its all-time closing high after a late sell-off. Dow futures were down 0.5 percent at 14,021, while S&P 500 futures shed 0.1 percent to 1509.25.
There's further U.S. economic news later that could impinge on the performance of U.S. stocks, notably the monthly Institute for Supply Management's survey into manufacturing conditions.
In Asia, Tokyo's Nikkei 225 stock index gained 0.4 percent to 11,606.38 on expectations that the Bank of Japan will push ahead with more drastic monetary easing under its future new governor, Haruhiko Kuroda. He requires parliamentary approval, before he succeeds current BOJ governor, Masaaki Shirakawa, when he steps down on Mar. 19.
Elsewhere in Asia, markets were lower as China's manufacturing grew at its weakest rate in five months in February as demand faltered and factories shut down for the Lunar New Year holiday.
Hong Kong's Hang Seng dropped 0.6 percent to 22,880.22. Australia's S&P/ASX 200 shed 0.4 percent to 5,086.10. South Korean markets were closed for a public holiday. Mainland China's benchmark fell 0.3 percent to 2,359.51.
The U.S. dollar has rallied this week thanks to positive economic news and rising tensions over Italy. The euro was down 0.1 percent at $1.3043 while the dollar rose 0. 3 percent to 92.85 yen.
Benchmark crude for April delivery was down 93 cents or 1.1 percent to $91.00 a barrel in electronic trading on the New York Mercantile Exchange.