WASHINGTON (MarketWatch) — The Treasury Department warned Thursday that a failure to raise the debt ceiling could lead to a financial crisis and recession even more damaging than the financial crisis of 2008.

A failure of the U.S. to pay its obligations if the debt limit is not raised “would be unprecedented and has the potential to be catastrophic,” Treasury said in a brief report intended for members of Congress and also released publicly by the agency.

“Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse,” the report said.

The report was leaked to Politico, and markets reacted earlier this morning.

The Dow Jones Industrial Average DJIA, -0.87% opened lower and the selling accelerated into the afternoon. The Dow was recently down 178 points to 14,954. .Read Market Snapshot.

The report examines the “long-lasting scars” on financial markets from the last standoff over the debt ceiling in the summer of 2011. It noted that this was accompanied by sharp declines in household wealth, increases in financing costs for businesses and households, and a fall in private sector confidence. Read: 5 market lessons from past government crises.

As in 2011, the economy seems vulnerable to such adverse shocks, the report said.

Consequences could include higher interest rates, reduced investment, higher debt payments, and slow economic growth. These impacts could last for more than a generation, the report concluded.

Even a “protracted debate” could lead to financial market stress, Treasury said.

Treasury Secretary Jacob Lew has said that emergency measures being used to hold the government under the debt ceiling since May expire on Oct. 17.

It is difficult to estimate whether a long-lasting government shutdown will extend that deadline, a senior Treasury official told reporters. The only way out of this crisis is for Congress to act, the official said.

Wall Street was largely blase all year to the possibility that Congress would be unable to raise the debt ceiling. President Barack Obama said Wednesday in an interview with CNBC that Wall Street “should be concerned.”

Treasury officials said they have now detected “some tentative signs” that the current debate is starting to affect markets.

Analysts also said they saw signs investors are beginning to hedge against the possibility of a default.

Kathy Lien, managing directors of foreign-exchange strategy for BK Asset Management, pointed out that the one-month T-bill rate rose to its highest level since last November and that credit default swaps have surged.

They noted that yields on Treasury bills that mature at the end of October are higher than bills that mature immediately before or after, suggesting some “nascent concerns about possible delays in payments on those bills.”

Earlier, Berkshire Hathaway BRK.A, +0.36% chairman and famed investor Warren Buffett called the current situation “idiocy” but said markets could afford for the debt ceiling to be violated, briefly at least.

“If it goes one second beyond the debt limit, that will not do us in,” the chairman of Berkshire Hathaway said on CNBC in an interview. “If it goes a year beyond that would be unbelievable.” Read more on Buffett comments.