By Kim Dixon and Thomas Ferraro
WASHINGTON (Reuters) - U.S. President Barack Obama's plans to extend tax cuts for all Americans ran into trouble on Tuesday as his fellow Democrats questioned whether he had been too quick to compromise with Republicans.
While analysts say the deal Obama struck with Republicans will still likely get passed in Congress, Obama risked a rift with many in his party who are already upset at heavy losses in last month's mid-term elections.
Stock markets in the United States and Europe applauded the tax deal, which would keep the current low rates in place for another two years even for the nation's richest households.
But support remained unclear among Democrats, who sought tax reductions only for the lower and middle class before they hand over control of the House of Representatives to Republicans in January.
Obama will hold a news conference on Tuesday at 2:20 p.m. (7:20 p.m. British time), the White House said. He is expected to discuss the compromise with Republicans that he unveiled on Monday to extend until 2012 the tax cuts enacted under Republican former President George W. Bush.
The deal calls for a 13-month extension of unemployment benefits, which could placate Democrats, but Obama also conceded to Republican demands on the estate tax, by proposing a 35 percent tax with a $5 million (3 million pounds) individual exemption level.
House Speaker Nancy Pelosi said Democrats would "continue discussions" on the deal in coming days. Representative Steny Hoyer, the No. 2 House Democrat, said he had not yet decided whether to back it.
"We had a long meeting yesterday with the president. There was at that point in time no consensus or agreement reached by the House leadership," Hoyer said.
Taxes would go up for almost all Americans if no extension is approved, and analysts predicted the measure would ultimately become law as enough Republicans would back the deal to offset the Democrats who oppose it.
"I think the support is there to pass this package," said Ethan Siegal, an analyst with The Washington Exchange, which tracks Congress for investors, who expects it to pass next week after critics are given a chance to speak out.
STOCKS RISE ON DEAL HOPE
Stocks rose on prospects that the tax breaks will prompt increased consumer spending and buoy the economy.
Vice President Joe Biden was headed to Capitol Hill to sell the deal at a lunchtime meeting with Senate Democrats and an evening meeting with those in the House.
The White House pointed out that the deal would achieve Democrats' priority by preventing a tax increase for working families that would average $3,000. It would also help those struggling in the wake of the worst recession since the 1930s by extending unemployment benefits and other tax cuts focussed on those with more modest incomes, the White House said.
But many Democrats argued that Obama had given Republicans their top priority -- extending the tax breaks for the richest 2 percent of U.S. households -- without getting enough in return.
"This is a deal that will continue to explode the deficit while the rich get richer and struggling middle-class families get crumbs," said Democratic Representative Betty McCollum, who said she would vote against it.
Moody's Investors Service is worried the extension of U.S. tax cuts could become permanent, hurting U.S. finances and its credit ratings in the long run.
Steven Hess, Moody's lead sovereign analyst for the United States, said he does not foresee any change in the U.S. AAA ratings in the next 18 months to two years, but says he is concerned about "what's going to happen in two years."
The Obama plan would cost $501 billion in lost tax revenues, according to the nonpartisan Congressional Budget Office, at a time when voters are increasingly concerned about budget deficits that have approached 10 percent of economic output in recent years.
"Generally tax deals like this are very good news, but unfortunately this reduces revenue on top of extending jobless benefits, which is bad for deficits. In the short run this is good news, but two to three years down the road foreign buyers of U.S. Treasuries may start to balk," said David Carter, chief investment officer at Lenox Advisors in New York.
Biden's office argued that the federal budget would recover within five years or so.
"These are responsible, temporary measures to support our economy that will not add costs by the middle of the decade," Biden's office said in a fact sheet outlining the deal.
A Republican aide warned that his party would block the inclusion of Build America bonds, a taxable bond program popular with states, cities, and other municipal issuers. Democrats said the issue was still on the table.
Tax breaks for ethanol, clean technology, and employers who hire unemployed workers were also in the mix.
(Writing by Andy Sullivan; Additional reporting by Donna Smith, David Morgan, Jeff Mason and Richard Cowan, Walter Brandimarte and Ryan Vlastelica; Editing by Will Dunham)