Stocks tumbled on Monday as political brinkmanship in Washington over the debt ceiling sparked fears of a U.S. rating downgrade, sending world equities lower and pushing gold to a record high.

A divided U.S. Congress pursued rival budget plans that appeared unlikely to win broad support, pushing the country closer to a debt default.

While analysts expected a deal to raise the debt ceiling by August 2, the United States moved one step closer to losing its coveted triple-A credit rating.

"We are in an uncertain situation, wrangling over the debt ceiling. We might be headed for something happening later in the week or weekend, but until then, the macro outweighs the good micro stories like good corporate earnings," said John Canally, investment strategist at LPL Financial in Boston.

The Dow Jones industrial average .DJI slid 100.02 points, or 0.79 percent, at 12,581.14. The Standard & Poor's 500 Index .SPX was down 9.58 points, or 0.71 percent, at 1,335.44. The Nasdaq Composite Index .IXIC took off 16.55 points, or 0.58 percent, at 2,842.28.

In company news, U.S.-listed shares of Research In Motion Ltd (RIM.TO)(RIMM.O) dropped 2.8 percent to $27.14 after the BlackBerry maker said it will cut about 11 percent of its workforce as it struggles to compete against Apple Inc (AAPL.O) and Google Inc (GOOG.O).

European shares dipped, threatening a one-week rally, as banking stocks dropped. U.S.-listed shares of Barclays (BCS.N) fell 4.4 percent to $14.91.

Gold hit a new peak at $1,622.49 an ounce, and was on track for its biggest monthly gain since April this month.

Also rattling investors, credit rating agency Moody's cut Greece's sovereign debt by three notches on Monday to 'Ca', one level above default. Greece has the lowest rating of any country in the world covered by Moody's.