Tense mood as lawmakers struggle for debt deal

FROM THE MORNING CALL

WASHINGTON (Reuters) - A bitter mood prevailed on Capitol Hill as lawmakers struggled on Saturday to find a compromise measure to lift the nation's $14.3 trillion debt limit three days before a deadline to avert a ruinous default.

A day after the Republican-led House of Representatives passed a bill to cut the deficit and raise the debt limit, Democrats who control the Senate pushed ahead with their own deficit-cutting plan.

Scrambling to put together legislation that could attract bipartisan support needed to pass it in the Senate, Democrats incorporated elements of a Senate Republican proposal.

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But entrenched differences remained, and back-channel talks held the best hope for a compromise. Unless Congress raises the debt ceiling, the government would be barred from further borrowing after Tuesday, according to the U.S. Treasury, and could quickly run out of money to pay all its bills.

With tensions high, Democrats accused Senate Republicans of refusing to talk to them. Senate Minority leader Mitch McConnell wanted the White House involved to ensure that any final bill has broad Democratic support, aides said.

The debt saga shifted to the Senate late on Friday after the House passed a deficit-cutting bill, breaking weeks of political inertia. The Senate, as expected, quickly killed that bill that would have extended the debt ceiling by just a few months, but its earlier approval by the House lifted hopes that it could form part of a final compromise.

President Barack Obama urged lawmakers to strike a deal and head off what he has said would be an "inexcusable" default.

"There are multiple ways to resolve this problem," Obama, a Democrat, said in his weekly radio address. "Congress must find common ground on a plan that can get support from both parties in the House. And it's got to be a plan that I can sign by Tuesday."

The Senate now is expected to vote on its legislation early on Sunday morning, setting up final passage on Monday morning, shortly before U.S. financial markets open.

In a symbolic move, the House was set to vote at around 2 p.m. EDT to consider the plan crafted by Senate Democratic leader Harry Reid. House Republicans said they expected to defeat that bill because it did not contain enough spending cuts.

"The Senate is burning up precious time by working all weekend on a doomed Reid bill that can't pass the House," a House Republican leadership aide said. The aide said "congressional talks are essentially motionless until Senator Reid provides specifics to the Hill on what the president will sign."

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With Republicans pushing to have the White House join the talks, Vice President Joe Biden, who has a rapport with McConnell from his years in the Senate, could emerge as a key player in final negotiations.

The world has watched with growing alarm as political gridlock in Washington has brought the world's largest economy close to an unprecedented default, threatening to plunge financial markets and economies around the globe into turmoil.

With its back against the wall, the U.S. Treasury could be forced to detail plans on Sunday before Asian markets open on which bills it would pay if a compromise does not appear to be in the works. Analysts believe it will stop other government spending to ensure bondholders are paid to avert a wide-scale financial crisis.

Senate Democrats' debt-limit proposal, which would cut $2.2 trillion over 10 years, was revised by Reid to incorporate parts of a "backup plan" first proposed by McConnell. Under the that version, Obama would be given the authority to raise the debt ceiling in three stages to cover U.S. borrowing needs through the 2012 elections when he is running for a second term.

The House Republican plan includes a two-stage strategy for raising the debt limit that could set up another showdown over the issue within a few months -- a prospect Obama has said is unacceptable

U.S. stocks endured their worst week in a year as the uncertainty made investors shy away from riskier assets and the dollar slumped to a record low against the safe-haven Swiss franc. Much worse could be in store if a U.S. debt deal doesn't appear to be on track by the time markets open on Monday.

A late deal also raises the prospect of the United States losing its top-notch AAA credit rating, which could rattle markets and raise borrowing costs for Americans struggling with unemployment above 9 percent.

(Additional reporting by Andy Sullivan, Alister Bull and Laura MacInnis in Washington and Michael Erman and David Gaffen in New York; Writing by Caren Bohan; Editing by Vicki Allen)

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