US debt crisis talks go down to wire

Addressing reporters on Capitol Hill, senior Republican Mitch McConnell, the Senate Minority leader, said he had talked to Obama and vice-president Joe Biden and was "confident and optimistic" that there would be an "agreement within the very near future".

A national default "is not going to happen," McConnell promised.

Republican House Speaker John Boehner also expressed optimism that an agreement was at hand. "In spite of our differences, we're dealing with reasonable, responsible people," Boehner said.

The encouraging development came after a series of votes in both houses on Capitol Hill in which the Democrats and Republicans seemed to be intractably entrenched in their opposing positions, with Wall Street becoming ever more jittery.

Earlier yesterday, the Senate knocked back plans to raise the country's debt ceiling and slash spending, and the Republican-led House voted down the Senate Democratic bill by 246-173.

The deadlock came despite warnings that a debt default could have catastrophic consequences for the world economy.

• From railroad hangers-on to masters of the world of credit

Fears that America will lose its AAA credit rating – regardless of whether a deal was struck – were growing with the escalation of the crisis, which could even threaten Obama's presidency.

The US government's finances will be thrown into chaos unless a $14.3 trillion (8.8 trillion) borrowing limit is increased by Tuesday. The stalemate has caused jitters in markets, and yesterday financial experts warned of a "precipitous" fall in shares worldwide unless the situation is stabilised before stock exchanges open tomorrow.

The wrangling that has led to deadlock saw the House of Representatives pass a Republican bill proposed by Boehner that recommended $900 billion of spending cuts and raising the debt ceiling by a similar amount.

The plan would have required another vote in mid-2012 and includes language in support of a so-called balanced budget amendment to the US constitution – both rejected by the White House and the Senate leadership.

The House vote was delayed from Thursday after Boehner struggled to win over a number of staunchly conservative Republicans, including newly-elected representatives who back the Tea Party movement. It was rejected by the Democrat-led Senate in a late-evening vote on Friday.

Obama has accused Republicans of pursuing a partisan bill that would force Washington into another debt limit fight within months.

"There are plenty of ways out of this mess, but we are almost out of time," Obama said, adding: "The time for putting party first is over. The time for compromise on behalf of the American people is now."

Analysts predict a last-minute scramble for a compromise and razor-edge votes in both chambers, with the high-stakes game of legislative brinkmanship expected to continue all weekend.

The president had been backing the Democrat proposal put forward by the Senate leader Harry Reid, which would cut $2.2 trillion from the deficit and raise the debt ceiling by $2.7 trillion.

Obama said: "Any solution to avoid default must be bipartisan. It must have the support of both parties, who represent the American people. I urge Democrats and Republicans in the Senate to find common ground on a plan that can get support from both parties in the House, a plan that I can sign by Tuesday."

Obama urged Republicans in the House of Representatives and the Senate to abandon a bill that "does not solve the problem" and has no chance of passage in the Senate.

"There are a lot of crises in the world that we can't always predict or avoid. This isn't one of those crises," he said.

Some Republicans began to encourage a compromise, with a spokeswoman for Senator Scott Brown, of Massachusetts, saying he could back "a Republican bill, or a Democrat bill – it doesn't matter" as long as it cuts spending, does not raise taxes and avoids default.

He added: "Unless there is a compromise, or they accept my bill, we're heading for economic disaster."

Investors and foreign governments are likely to remain on edge, as procedural hurdles make it difficult for Congress to send a deal to Obama until tomorrow night. Reid's revised proposal, which would cut $2.2 trillion over ten years, incorporates parts of a "back-up plan" first proposed by McConnell.

The new version would essentially give Obama the authority to raise the debt ceiling in three stages to cover US borrowing needs through the 2012 elections, when he is running for a second term.

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

US 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 Swiss franc.

Much worse could be in store if a US debt deal doesn't appear to be on track by the time markets open tomorrow.

The impasse led to First Minister Alex Salmond joining the pleas for progress and co-operation.

The Scottish National Party leader said: "While this is a domestic issue to be resolved within the United States' system of government, it clearly has very considerable international ramifications in terms of economic recovery and confidence, and it is in all our interests that the deadlock is overcome."