US President Barack Obama met with congressional leaders for talks aimed at avoiding the "fiscal cliff".
Obama said he still believed an agreement could be reached before the January 1 deadline.
After Obama and the leaders of Congress held an hour-long, high-stakes meeting Friday afternoon to try to avoid the severe, automatic austerity measures that threaten to send the economy sputtering into another recession, the president called the gathering "good and constructive".
"The hour for immediate action is here," Obama declared.
Democratic Senate Majority Leader Harry Reid and Republican leader Mitch McConnell gave a relatively upbeat assessment after the meeting.
"I am hopeful and optimistic" of reaching an agreement after months of gridlock, McConnell said.
He said he hoped for a compromise that could be presented to rank and file lawmakers by Sunday, little more than 24 hours before the year-end deadline.
Reid said, "I'm going to do everything I can" to make a deal happen, but cautioned, "Whatever we come up with is going to be imperfect."
The US faces the fiscal cliff because tax rate cuts dating back to President George W Bush's tenure expire at the end of the year. The pending across-the-board reductions in government spending, which will slice money out of everything from social programmes to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties' inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.
Facing a deadline that was born out of Washington's dysfunction, success was far from guaranteed – even on a slimmed-down deal that postponed hard decisions about spending cuts into 2013 – in a Congress where lawmakers grumbled about spending the new year holiday in the Capitol.
If Congress can't reach a broad deal to rein in deficit spending, Obama said Congress should allow a vote on a basic package that would preserve tax cuts for middle-class Americans while extending unemployment benefits for the long-term jobless and working toward a foundation for a broader deal.
Republicans and Democrats say privately that any agreement would likely include an extension of middle-class tax cuts that had been set to expire at the end of the year, with increased tax rates at upper incomes – a priority that was central to Obama's re-election campaign.
A person familiar with the talks, who said the president was reviewing his proposal from a week ago, when he urged lawmakers to preserve tax cuts for most while letting rates rise above incomes of $250,000 a year. At the same time, Obama said lawmakers should extend unemployment benefits for the long-term jobless. The person was unauthorized to discuss the private meeting publicly and spoke on condition of anonymity.
House of Representatives Speaker John Boehner, House Democratic Leader Nancy Pelosi, McConnell and Reid and were all attending Friday's White House meeting. Vice President Joe Biden and Treasury Secretary Timothy Geithner also attended.
Obama's meeting with Congressional leaders – the first since November 16 – happened after the president cut short his Hawaiian holiday to return to Washington. It likely centered on who would face higher tax rates, extending unemployment insurance and preventing a cut in federal Medicare payments to doctors, among other issues.
"The clock is ticking," Sen. Max Baucus, chairman of the Senate Finance Committee, said in remarks on the Senate floor during the meeting. "My message to them is simple. We can do this. We can get this done, and we must."
For Obama, the eleventh-hour scramble represented a test of how he would balance strength derived from his re-election against an avowed commitment to compromise in the face of divided government. Despite early talk of a grand bargain between Obama and Boehner that would reduce deficits by more than $2-trillion, the expectations were now far less ambitious
Adding pressure was this week's warning from Geithner that the government would hit its $16.4-trillion borrowing limit on Monday, the final day of the year. That would make it harder for the US to pay its bills.
A key question heading into Friday's meeting was whether Obama would agree to abandon his insistence during his re-election campaign on raising taxes on households earning more than $250 000 a year and instead accept a $400 000 threshold like the one he has offered in negotiations with Boehner. Those talks collapsed, and Boehner's own proposal to increase taxes only on anyone earning more than $1-million was doomed by a revolt among conservative Republicans who oppose any tax hikes.
The deal also would likely put off the scheduled spending cuts and extend expiring unemployment benefits, officials said.
If a deal were to pass the Democratic-controlled Senate, Boehner would have to agree to take it to the floor in the Republican-controlled House.
The stock market was down again on Friday amid the developments in Washington. Economists say that if the tax increases are allowed to hit most Americans and if the spending cuts aren't scaled back, the recovering but fragile economy could sustain a shock. – Sapa-AP