President Barack Obama and congressional leaders struggled on Sunday to break a partisan deadlock on a budget deal to avoid a U.S. debt default and reassure global markets, with no sign of a deal emerging.
Senate Democratic leader Harry Reid planned to brief Obama on a plan to cut $2.5 trillion in government spending over a decade to allow for a vote to raise the $14.3 trillion U.S. debt ceiling by the August 2 deadline.
Significantly, his plan does not raise tax revenues, which is in line with Republican demands that no tax increases be included.
An aide said Reid hopes to send the measure to the Senate floor for passage early this week.
At the White House, Obama met Reid and House of Representatives minority leader Nancy Pelosi, to take stock of any movement in Sunday negotiations.
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The initial reaction to the lack of a deal as Asian financial markets opened was mild with the euro gaining against the dollar in early trading. The dollar fell to a four-month low against the Japanese yen.
U.S. stock index futures fell more than 1 percent while gold hit a new high of $1,616.89 in early trade in Asia.
"I suspect the initial reaction in markets will not be happy," said Jim Awad, managing director at Zephyr Management in New York. "I don't think they'll go into a panic because they'll wait to see what happens tomorrow."
White House Chief of Staff Bill Daley warned that there would be a "few stressful days" ahead for financial markets, with the deadline to lift the U.S. borrowing limit drawing ever closer. Appearing on the CBS television program "Face the Nation, he said the United States will not default.
House of Representatives Speaker John Boehner gave fellow Republicans a progress report on his efforts to forge a plan but there was no sign Republicans had settled on a deal.
The battle is over how deeply to cut government spending on social programs and whether to increase taxes. Democrats want to ease the pain of spending cuts by increasing taxes on the wealthy, a prospect Republicans oppose.
Boehner told the Republicans that a key obstacle is that Obama wants a $2.4 trillion debt limit increase all at once to last through the 2012 election, "without any guarantees that we're going to cut more than $2.4 trillion in spending."
He said he believed both parties agree that significant spending cuts are needed and urged unity among Republicans.
"It's gonna require some of you to make some sacrifices. If we stand together as a team, our leverage is maximized, and they have to deal with us. If we're divided, our leverage gets minimized," he said, according to a source familiar with the conference call Boehner conducted.
Democrats and Republicans traded blame for the inability to strike an agreement. The two sides are deadlocked over Republicans demands for a short-term debt-limit increase that would force President Barack Obama to request further borrowing authority in early 2012.
Obama and congressional Democrats insist on a longer-term extension of the borrowing limit that would carry the country through the presidential election in November 2012.
"We're kind of at an impasse," a Senate Democratic aide told reporters.
Financial markets are growing more worried about the possibility of a debt default that could drive up interest rates, sink the dollar and send shockwaves through economies around the world.