Top Republicans and Democrats worked behind the scenes on Wednesday on a compromise to avert a crippling U.S. default, looking to salvage a last-minute deal from rival debt plans that have little chance of winning broad congressional approval on their own.
With financial markets increasingly on edge, the White House said it saw no alternative to striking a deal to raise the government's borrowing limit by an August 2 deadline to allow the world's largest economy to keep paying all of its bills.
"People keep looking for off-ramps. They don't exist," White House spokesman Jay Carney told reporters, saying the government would be "running on fumes" after the deadline unless the limit was raised.
Even if a deal is reached to lift the $14.3 trillion debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of the top-notch U.S. credit rating, which would push up U.S. and global borrowing costs.
The faltering moves to break the deadlock are already weighing on investors. Along with the uncertainty, Wall Street was hit by weak earnings and lackluster economic data, suffering its worst day in eight weeks.
"The market is beginning to show real concerns in terms of a default. I don't think it's going to happen ... (but) are we headed for a downgrade? That is becoming more of a possibility as each day goes by," said Peter Cardillo, chief market economist at Avalon Partners in New York.
The U.S. dollar rebounded after a sell-off this week but policy makers in countries from Japan to France fretted over how a crisis of confidence in U.S. solvency could spill into the international economy.
Worried investors shifted funds into traditional safe havens gold and the Swiss franc, which both rose to record highs in dollar terms.
Leaders in the Republican-controlled House of Representatived Democratic-controlled Senate scrambled to find common ground but complications s anwith their competing plans could send attempts at a compromise right down to the wire.
"You're going to have to make sure that you can have a spending cut package that can pass both chambers -- there's going to be some work to do there," senior White House adviser David Plouffe said on the PBS show "NewsHour."
President Barack Obama, a Democrat who will seek a second term in November 2012 elections, has been largely consigned to the sidelines for now.
Senate Democratic Leader Harry Reid, House Speaker John Boehner, the top Republican in Congress, and Senate Republican Leader Mitch McConnell have been talking about how to break the impasse, several lawmakers said.
"GET YOUR ASS IN LINE"
Boehner, facing a mutiny by Republican lawmakers aligned with the fiscally conservative Tea Party movement, has been feverishly canvassing support for a vote on Thursday on his reworked deficit reduction bill. It is expected to be close.
At a morning meeting, he appeared to be firming up support from several wavering lawmakers as he told them to "get your ass in line" behind what he has described as the best chance to win the deep spending cuts that Republicans seek.
His bill is not expected to pass the Senate but his negotiating position could be strengthened if it gets the 217 votes needed in the House.
If it fails, Boehner would be weakened and his job may be on the line.
If Congress does not increase the debt limit, the United States could eventually suffer its first full government default that could put its faltering economic recovery into reverse and send shock waves through the global economy.
Analysts expressed confidence a deal could be reached.
"We continue to believe it is overwhelmingly likely that a debt deal is passed without a crisis," Eurasia Group said in a briefing note. "The two sides have furnished proposals that significantly overlap and leave room for compromise."
Reid said he could easily modify his own bill to incorporate elements of Boehner's bill in a way that could win support from both parties in the Senate. This would improve the chances for a compromise deal that has so far been elusive.
"There will be sufficient cooperation so a bill will pass that allows the debt limit to be lifted, with deficit reduction," Democratic Senator Max Baucus said.
Both sides acknowledge similarities between their plans.
Reid's measure has a concession aimed at winning Republican support -- no tax increases. It also cuts more spending than Boehner's proposal, according to an independent assessment.
Tea Party groups have called on Republican lawmakers to reject any compromise, including the Boehner plan.
A Tea Party rally outside the Capitol in Washington drew about 40 participants, including presidential candidate Herman Cain, who urged Republican leaders to "hold the line" in demanding spending cuts and opposing tax increases.
"Government's too big. That's what this is about," said one protester, Kathy Smith from Fairfax, Virginia.