Lawmakers abandoned their high-profile effort to rein in the country's ballooning debt on Monday in a sign that Washington likely will not be able to resolve a dispute over taxes and spending until 2013.
The admission of defeat by Republicans and Democrats on a 12-member congressional super committee is likely to cement perceptions among voters and investors that politicians are too divided to tackle trillion-dollar budget deficits and a national debt that now is roughly equal to the U.S. economy.
Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve, Republican Representative Jeb Hensarling and Democratic Senator Patty Murray said in a joint statement.
But lawmakers will be less willing to compromise as they shift their attention to the November 2012 presidential and congressional elections. The finger-pointing began within minutes of the announcement.
President Barack Obama said Republicans had scuttled the talks by refusing to consider tax hikes on the wealthy.
They simply will not budge from that negotiating position and so far that refusal has been the main stumbling block that has prevented Congress from reaching an agreement to further reduce the deficit, Obama said at the White House.
Republicans blamed Obama for a lack of leadership and said his Democrats had been unwilling to consider a fundamental overhaul of government-run healthcare programs that could swamp the economy in coming decades as the population ages.
The panel waited until after U.S. markets closed at 4 p.m. (9:00 p.m. BT) to formally declare the effort dead, but shares on Wall Street had already hit a one-month low due to fears of out-of-control government debt in Europe and the United States.
The committee's failure to agree on $1.2 trillion in deficit reduction sets up a year of uncertainty on taxes and spending that could further rattle investors.
Congress is now set to deliver those budget savings through automatic cuts to defence and domestic programs, but some Republicans have vowed to prevent them from hitting the military. Obama said he would veto any effort to do so.
Credit-rating agencies could downgrade U.S. debt if the cuts were rolled back, an event that could rattle markets that have already been shaken by the euro zone's debt woes.
Standard & Poor's said the news validated its decision to issue a first-ever U.S. credit downgrade in August. Moody's Investors Service said that failure, by itself, would not lead to a rating change.
Democrats will scramble to extend economy-boosting measures, such as a tax cut for workers and enhanced jobless benefits, which are due to expire at the end of the year. Analysts say the economy could suffer if they are not extended, but Republicans are likely to insist on spending cuts to offset their $168 billion cost.
Obama has kept his distance from the talks, choosing instead to emphasise a job-creation package that has been blocked by Republicans. Aides say the collapse of the super committee will help him paint Republicans as obstructionist as he campaigns for re-election.
During the talks, Republicans showed a new willingness to move from their staunch opposition to tax increases as they pushed for an overhaul that would have closed tax breaks and lowered rates.
Democrats rejected the proposal after they determined it would have led to a lower tax burden for the wealthy.
(Additional reporting by Steve Holland, Rachelle Younglai, Kim Dixon, Susan Cornwell, Donna Smith, Alister Bull and Dave Clarke; Writing by Andy Sullivan; Editing by Peter Cooney)