The S&P/TSX composite index dropped 57.64 points to 12,316.12 as the clock ticked towards huge spending cuts and significant tax increases that will automatically click in after Dec. 31 if there is no deal.
The American economy is already weak and economists warn that the imposition of those measures could tip the U.S. back into recession and depress other economies around the globe unless the White House and Congress find a compromise budget plan.
The TSX Venture Exchange was ahead 5.09 points to 1,201.84.
The Canadian dollar was down 0.16 of a cent at 100.35 cents US.
U.S. markets were also depressed with the Dow industrials down 158.2 points to 12,938.11, the Nasdaq off 25.59 points at 2,960.31 and the S&P 500 index down 15.67 points at 1,402.43.
Traders had looked forward to a mid-afternoon meeting at the White House for last-minute talks. But losses deepened in the last minutes of the session amid reports that Obama was not presenting a new budget offer to congressional leaders.
Democrats want a deal that would let tax rates rise for the wealthiest taxpayers, a measure opposed by Republicans.
North American markets lost ground this shortened trading week as top U.S. lawmakers continued to cast blame on each other for the fiscal-cliff impasse while portraying themselves as open to a reasonable last-minute bargain.
The TSX declined 0.56 per cent while the Dow industrials gave back 1.9 per cent.
Traders have been focusing on Washington and the budget negotiations since the Nov. 6 presidential election returned a divided government to power.
"I can’t wait till this is done, so we can start talking about markets again and not just about politics," said Doug Cote, chief market strategist at ING Investment Management. Cote added that he doesn’t expect lawmakers will manage to reach a deal before the deadline.
Traders took note of an apparent improvement in the housing sector as the number of Americans who signed contracts to buy homes increased last month to its highest level in two and a half years.
The U.S. National Association of Realtors said its seasonally adjusted pending home sales index rose 1.7 per cent in November from October to 106.4.
The increase points to higher sales of previously occupied homes in the coming months. There’s generally a one- to two-month lag between a signed contract and a completed sale.
Commodities were lower and February bullion declined $7.80 to US$1,655.90 an ounce while the gold sector declined about one per cent. Barrick Gold Corp. (TSX:ABX) faded 36 cents to C$33.88 while Goldcorp Inc. (TSX:G) dropped 53 cents to $35.45.
Rail stocks helped push the industrials sector down 0.8 per cent with Canadian National Railways (TSX:CNR) off 59 cents at $89.96 and Canadian Pacific Railway (TSX:CP) shedding 70 cents to $100.50.
March copper closed down a penny at US$3.59 a pound. The mining sector fell 0.35 per cent with Teck Resources (TSX:TCK.B) down 52 cents at C$35.07, while First Quantum Minerals (TSX:FM) gave back 29 cents to $21.20.
The energy sector dropped 0.47 per cent as February crude on the New York Mercantile Exchange slipped seven cents to US$90.80 a barrel. Suncor Energy (TSX:SU) declined 40 cents to C$32.22 while Talisman Energy (TSX:TLM) shed 16 cents to $11.01.
The financial sector was also a drag with Scotiabank (TSX:BNS) down $1.06 to $57.43.
On the corporate front, Research In Motion Ltd. (TSX:RIM) shares climbed five cents to $11.75. The BlackBerry maker has sold NewBay to mobile services company Synchronoss Technologies Inc. for US$55.5 million. NewBay’s cloud-based services allow customers to store, share and deliver content like photo albums, social networking and other data through smartphones, tablets and other electronic devices.