By DONNA CASSATA
Associated Press

WASHINGTON (AP) – The United States moved perilously closer to an economy- rattling default and a partial government shutdown entered its third week as Senate Democratic and Republican leaders remained at odds over spending in their last-ditch negotiations to end the crises gripping the nation.

Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R- Ky., spoke by phone Sunday but failed to agree on a deal to raise the nation’s borrowing authority above the $16.7 trillion debt limit or reopen a government still shuttered on its 14th day. Congress is racing the clock with Treasury Secretary Jack Lew warning that the U.S. will quickly exhaust its ability to pay the bills on Thursday.

The reaction of world markets and the Dow Jones on Monday could provide the necessary jolt to Senate leaders, who represent the last, best chance for a resolution after talks between President Barack Obama and House Republican leaders collapsed.

The shutdown has furloughed 350,000 federal workers, impeded various government services, put continued operations of the federal courts in doubt and stopped the IRS from processing tax refunds. Some parks and monuments remain closed, drawing a protest at the National World War II Memorial on Sunday that included tea party-backed lawmakers who had unsuccessfully demanded defunding of President Barack Obama’s 3-year-old health care law in exchange for keeping the government open.

Economists see greater financial danger from an historical default. Christine Lagarde, the International Monetary Fund’s managing director, spoke fearfully about the disruption and uncertainty, warning on Sunday of a “risk of tipping, yet again, into recession” after the fitful recovery from 2008.

Reid and McConnell – five-term senators hardened by budget disputes and years of negotiations – are at an impasse over the automatic, across-the-board spending cuts known as sequestration and whether to undo or change them as part of a budget deal. Republicans want to keep the spending at the deficit-cutting level of the 2011 budget law while Democrats are pressing for a higher amount.

“I’m optimistic about the prospects for a positive conclusion to the issues before this country today,” Reid said as the Senate wrapped up a rare Sunday session.

McConnell insisted a solution was readily available as he embraced the proposal from a bipartisan group of 12 senators, led by Sens. Susan Collins, R- Maine, and Joe Manchin, D-W.Va., that would re-open the government and fund it at current levels for six months while raising the debt limit through Jan. 31.

It also would give agencies greater flexibility in dealing with the automatic budget cuts, delay the medical device tax for two years and establish income verification for individuals receiving subsidies to buy health insurance.

“It’s time for Democrat leaders to take `yes’ for an answer,” McConnell said in a statement.

But six Democrats in the group and a spokesman for Collins said late Sunday that while negotiations continued this weekend, there was no agreement.

Politically, Republicans are reeling, bearing a substantial amount of the blame for the government shutdown and stalemate.

“We’re in a free-fall as Republicans, but Democrats are not far behind,” said Sen. Lindsey Graham, R-S.C., in warning Democrats about seizing on the GOP’s bruised brand as leverage to extract more concessions.

McConnell and Republicans want to continue current spending at $986.7 billion and leave untouched the new round of cuts on Jan. 15 that would reduce the amount to $967 billion. Democrats want to figure out a way to undo the reductions, plus a long-term extension of the debt limit increase and a short-term spending bill to reopen the government.

“Republicans want to do it with entitlement cuts,” said Sen. Chuck Schumer, D-N.Y. “Democrats want to do it with a mix of mandatory cuts, some entitlements and revenues. And so how do you overcome that dilemma? We’re not going to overcome it in the next day or two.”

He suggested keeping the government running through mid-January.

Sen. Dick Durbin of Illinois, the No. 2 Democrat in the Senate, told reporters the two sides are roughly $70 billion apart, the difference between the $1.058 trillion Senate budget amount and the $988 billion envisioned by House Budget Committee Chairman Paul Ryan, R-Wis.

“We haven’t picked a number, but clearly we need to negotiate between those two,” Durbin said.

Republicans dismiss the latest request as Reid moving the goalposts in negotiations as they were getting closer to resolving the stalemate that has paralyzed Washington. They also argue that it is disingenuous for Democrats to resist any changes in the 3-year-old health care law while trying to undo the 2011 budget law that put the cuts on track.

“I think the Democrats are on the verge of being one tick too cute as they see the House possibly in disarray – they now are overreaching, and I think that what we’ve got to do is get this back in the middle of the road, act like adults,” said Sen. Bob Corker, R-Tenn.

Graham and Sen. Rand Paul, R-Ky., said they would not support any deal that upends the spending limits imposed by the 2011 law, and predicted that their Senate GOP colleagues would oppose it as well.

Unclear was whether any Senate deal would pass the Republican-controlled House by Thursday, though Senate Democrats were hoping momentum and an imminent default would pressure House lawmakers.

Graham appeared on ABC’s “This Week,” Corker was interviewed on “Fox News Sunday,” Schumer spoke on CBS’ “Face the Nation” and Lagarde was on NBC’s “Meet the Press.”

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