Stocks dipped on Monday as lawmakers were locked in a standoff over dueling debt plans, but growing optimism over an eventual deal helped to limit losses.

S&P health care <.GSPA>, telecommunications <.GSPL> and consumer staples <.GSPS> sectors were the weakest, erasing some of last week's market gains.

Declining stocks outnumbered advancers on both the New York Stock Exchange and Nasdaq, indicating investors remained cautious. On the NYSE, decliners outweighed advancers by nearly 3-to-1, while Nasdaq losers beat winners by about 9-to-4.

U.S. lawmakers continued their political brinkmanship, increasing the threat of a ratings downgrade and default that could sow chaos in global markets.

However, many market strategists said a deal was likely, even if it does not change enough of the U.S. debt picture to avoid a credit rating downgrade down the line.

They could go through these debates after the expiration, and this is what the market is feeling right now -- that it doesn't necessarily mean the government will inevitably go into default on August 2. That's causing a snapback in the stock market, said Robbert Van Batenburg, head of equity research at Louis Capital in New York.

The Dow Jones industrial average <.DJI> dropped 65.66 points, or 0.52 percent, at 12,615.50. The Standard & Poor's 500 Index <.SPX> was down 4.59 points, or 0.34 percent, at 1,340.43. The Nasdaq Composite Index <.IXIC> shed 6.96 points, or 0.24 percent, at 2,851.87.

But investor anxiety remained, reflected in the CBOE Volatility Index <.VIX>, which jumped 9 percent, its biggest percentage increase in two weeks.

The political jousting in Washington pushed gold prices to record highs as the fear of a default raised the appeal of the bullion versus the greenback. The dollar fell to a record low against the Swiss franc.

Strong earnings reports have offset worries about the debt debate, helping stock indexes post gains last week.

But in the latest corporate news, Kimberly-Clark Corp declined 2 percent to $66.55 after it said 2011 profits may be at the low end of its forecast.

U.S.-listed shares of Research In Motion Ltd were off 3.7 percent at $26.87 after the BlackBerry maker decided to cut about 11 percent of its workforce as it struggles to compete against Apple Inc and Google Inc .

Overall market volume was lighter than average.

(Reporting by Caroline Valetkevitch; additional reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)