President Barack Obama and top lawmakers said progress was made in urgent budget talks late Wednesday and that negotiators would work through the night to try to avert a government shutdown.
With the clock ticking toward a midnight Friday deadline, Obama met with Republican House of Representatives Speaker John Boehner, and Senate Majority Leader Harry Reid, a Democrat.
I thought the meetings were frank, they were constructive and what they did was narrow the issues and clarify the issues that are still outstanding, Obama said after the talks.
Emerging from the 90-minute Oval Office meeting, Boehner and Reid appeared jointly before reporters and vowed to keep working toward a deal, although they made clear that there were still deep divisions.
Republicans and Democrats have struggled to break a deadlock over measures to continue funding for government operations and keep more than 800,000 workers in their jobs past Friday's deadline.
Reid said the White House meeting was very honest.
I have confidence we can get this done. We're not there yet, but hope lies eternal, he said.
Boehner said there were honest differences but there was progress. He said there was no agreement on a figure for spending cuts.
The two leaders said their staffs would work through the night to try to reach an agreement, and they would meet on Thursday morning to assess the work of their aides and continue to talk.
Obama and Reid plan to talk in the morning to determine whether another White House meeting is needed.
'SENSE OF URGENCY'
The president said he thought a deal could be reached, but it's going to require a sufficient sense of urgency from all parties.
A government shutdown, the first in 15 years, would ripple through an economy still recovering from the worst recession since the 1930s. Obama urged both parties to compromise and said failure to reach agreement would hurt the economy just as it was gaining momentum.
Also late Wednesday, House Republicans pushed through that chamber's budget committee a fiscal 2012 budget blueprint that would slice about $6 trillion in spending over the next decade.
The savings would be achieved largely by cutting domestic spending and reducing Medicare and Medicaid healthcare benefits for the poor and elderly over the long-term.
The White House has painted a bleak picture of the potential impact of a government shutdown, saying it could hurt recovery in the housing market and spark reactions ranging from the closure of national parks to the suspension of the weekend cherry blossom parade in the capital.
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.
The investment firm Goldman Sachs estimated a government shutdown lasting more than a week could cost the economy $8 billion in missed federal spending, dragging down growth.
Both parties blamed each other for the political showdown, which will set the stage for more budget battles ahead and also promises to echo through the 2012 election campaign.
The budget fight 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 of slashing government spending and reducing the size of the federal government.
Boehner is under pressure to push for deeper cuts from fiscal conservatives aligned with the Tea Party movement who oppose any compromise. Democrats said the Tea Party was the driving force in the showdown.
Boehner told ABC News in an interview that there was no daylight between him and the Tea Party. What they want is they want us to cut spending, he said.
A new Gallup poll showed that most Americans favored a compromise. Fifty-eight percent of those surveyed wanted government leaders who share their views to back a compromise. Just 33 percent said it would be better to hold out for a budget they agree with, even if that forced a shutdown.
(Additional reporting by Alister Bull, Matt Spetalnick, Donna Smith, Thomas Ferraro, Tim Reid and David Morgan; Writing by Caren Bohan and John Whitesides; Editing by Paul Simao and Mohammad Zargham)