Congressional negotiators on Wednesday raced against a looming deadline to craft a budget deal that would cut billions of dollars in spending and keep the government operating beyond Friday.

With time running short, Republican and Democratic negotiators struggled to hammer out a compromise before midnight on Friday to avert a federal government shutdown the White House said would idle more than 800,000 workers.

A Senate Democratic leader expressed growing optimism about a deal. I feel better about it today than I did yesterday at the same time, Dick Durbin, the No. 2 Senate Democrat, told reporters.

Republican House of Representatives Speaker John Boehner spoke with President Barack Obama for about three minutes in a morning phone call and told the president he remained hopeful of a deal, a Boehner aide said.

The White House painted a bleak picture of the potential impact of the first government shutdown in more than 15 years, ranging from the closure of national parks to the suspension of the weekend cherry blossom parade in Washington.

A senior administration official told reporters the processing of some tax refunds and audits, as well as small business loans would be halted, and operations of the Federal Housing Administration would be curbed.

Having the FHA not be able to guarantee loans during this period will have a significant impact if we shut down on the housing market, which is very fragile, the official said.

Both parties blamed each other for the political showdown, which will set the stage for more budget battles ahead and promises to echo through the 2012 election campaign.

EVOLVING TALKS

Senate Democratic leader Harry Reid said the budget talks were constantly evolving and accused Republicans of changing the terms of the debate ahead of the midnight Friday deadline.

Every time we agree to meet in the middle they move where the middle is, Reid said as the Senate opened on Wednesday. We stand here with fewer than 72 hours on the clock ... It's time to get the job done.

Negotiators had tentatively agreed on a figure of $33 billion earlier this week, but Boehner is now pushing for a target of $40 billion.

The two sides also must resolve which programs would go under the knife to satisfy Republican demands for sharp spending cuts in the current fiscal year.

White House negotiators are still willing to discuss a final figure on spending cuts but say if Republicans insist on reducing abortion funding and halting the Environmental Protection Agency's greenhouse gas rules a government shutdown is much more likely, Democratic sources familiar with the budget talks said.

A Republican insistence on the inclusion of such hot button budget riders poses the greatest threat of a government shutdown, the Democratic sources said.

The budget showdown is the biggest political test for both parties since Republicans swept to power in the House and made big Senate gains in last year's elections on promises to slash government spending and reduce the federal government.

(Additional reporting by Matt Spetalnick, Caren Bohan, Donna Smith, Thomas Ferraro, Tim Reid and David Morgan; Writing by John Whitesides; editing by Vicki Allen and Deborah Charles)

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