* Gold hits record high, JGB yields at 8-month low
* US 10-yr notes steady, some see last-minute debt deal
* Dollar drops as Moody's puts U.S. on review
* Euro bounces back, but debt worries linger
* Asian stocks tread lower as investors cut risk
By Vikram Subhedar
HONG KONG, July 14 (Reuters) - The dollar fell on Thursday, sending gold to a record high, after a Moody's warning on the United States' credit rating but resilience in U.S. Treasuries suggested bond investors expected lawmakers to ultimately raise the county's debt ceiling in time to avoid default.
The weak dollar gave the beleagured euro a slight reprieve although a looming Italian bond auction kept investors on edge.
European stock markets were set for a lower start with Britain's FTSE 100 seen down 1.2 percent and Germany's DAX down a percent.
Italy will likely have to pay a hefty price to sell up to 5 billion euros of long-term bonds in what will be a key test of market appetite for the country's debt since contagion worries sparked a sharp sell-off in its assets.
The standoff in the U.S. Congress over raising Washington's debt ceiling while disagreements over a plan to reduce the ballooning deficit prompted Moody's to place its Aaa rating on review for a possible downgrade for the first time since 1996.
For markets, the stalled U.S. debt talks have added to worries that Europe's sovereign debt crisis is worsening. Meantime, euro zone leaders sought to break an impasse on how and when to grant Greece urgent aid.
The risk of a lower credit rating for the U.S. overshadowed Federal Reserve Chairman Ben Bernanke's suggestion, in testimony to Congress, that the central bank could provide more stimulus if the economy weakens further.
"It's a very political environment right now and that's causing all this volatility and you'd have to be too brave to take very big decisions," said Elke Schoeppl-Jost, Chief Investment Officer at BEA Union Investment in Hong Kong.
"Gold is speaking its own language and I expect its rise will continue," said Schoeppl-Jost. "Especially if there is more money-printing from the U.S."
The potential for another round of asset purchases by the Fed, known as quantitative easing, and the Moody's warning added up to a double whammy for the dollar.
It slid to a four-month low of 78.48 against the yen earlier in the day before regaining some ground to hit a session high of 79.01 on talk that a U.S. bank was a buyer of dollars. .
The stronger yen drove demand for Japanese government bonds with the yield on 10-year JGBs dropping below 1.085 percent to an eight-month low and the benchmark Nikkei stock index which ended 0.3 percent lower.
Exporters were hit by the yen's rise with Sony Corp down a percent and Toyota off 0.8 percent.
Adding a layer of uncertainty to already jittery markets, a senior official at Japan's Ministry of Finance said it was possible Japan could intervene in the market without giving any advance warning.
The White House and Congress must forge a deal to raise America's debt limit by Aug. 2 or the government will run out of money to pay its bills and default on some obligations. But they have so far failed due to a sharp divide over taxes.
DOLLAR WOES
The U.S. currency was on the run in Asia hitting a fresh record low against the Swiss franc around 0.8082 francs earlier while the euro rose to $1.4177 after having fallen to as low as $1.3984.
Against a basket of currencies, the dollar was down 0.2 percent at 75.092 , having tumbled for a high of 76.053.
The Moody's warning has intensified pressure on U.S. lawmakers to scramble together a deal to avert a debt default.
"We believe that the most likely scenario is that the Moody's statement provides motivation for a more serious push to a political compromise and USD selling on this factor may unwind," said Steve Englander, head of G10 foreign exchange strategy at Citigroup.
Gold powered to a fresh record on course for a ninth successive day of gains, matching a similar winning streak in 2006.
Elsewhere in Asia, the MSCI Asia ex-Japan was trading down 0.3 percent lower with Hong Kong's Hang Seng index down 0.3 percent.
"From a macro perspective and even a fundamental perspective Asia is in a much stronger position than the West, but you can't look at Asia in isolation," said Catherine Yeung, investment director at Fidelity Investments in Hong Kong.
"You look at market turnover and it's been incredibly thin. From a fund flow point of view, the biggest risk for Asia Pacific markets still remains what's going in the U.S. and Europe," said Yeung, who added that there were buying opportunites based on valuations for long-term investors in Asia.
Thomas Kwan, Head of Asian Debt Investment at Baring Asset Management, said a U.S. technical default "would be troublesome to the market, even for a very short period of time. Look at what happened to Italy on Monday."
"But this will not mean real money accounts will actually sell heavily into this event as investors will still believe that the US will at least come up with a plan to service debt very quickly, if not, it would be disastrous for the global financial system global and economy."
* For Reuters Global Investing Blog, click on
http://blogs.reuters.com/globalinvesting
* For the Macro Scope Blog, click on
http://blogs.reuters.com/macroscope
* For Hedge Fund Blog, click on
http://blogs.reuters.com/hedgehub (Additional reporting by Umesh Desai; Editing by Richard Borsuk)