President Barack Obama and top Republican John Boehner met at the White House on Monday as hopes rose that Washington will be able to head off steep tax hikes and spending cuts that could push the economy into recession next year.
The 45-minute meeting is a further sign that talks to avert the "fiscal cliff" could be yielding progress after weeks of stalemate, and aides from both parties said they were optimistic that a deal could be reached in coming days.
"We're getting close," said one Democratic aide, who added however that a deal is not imminent.
Although both sides still had major differences, investors were cheered by signs of progress. The Standard & Poor's 500 index was up 0.95 percent at midday.
"The fiscal cliff is starting to get ironed out," said Frank Davis, director of sales and trading at LEK Securities.
Boehner, the speaker of the Republican-controlled House of Representatives, has edged closer to Obama's demand to raise taxes on the wealthiest Americans. They have yet to make headway on possible spending cuts that are likely to face resistance from Obama's Democrats.
Boehner has agreed to a tax increase for those earning over $1 million annually, while Obama wants that threshold set at $250,000. His offer knocks down a key Republican road block, and the question now boils down to what Obama will offer in return.
The two sides face a deadline of December 31, when $600 billion in across-the-board spending cuts and tax hikes are due to begin kicking in, a jolt to the economy that could throw it back into recession.
Even if the two men agree to a deal this week, they may not have enough time to get it passed before the New Year. In that case, they might agree to extend the deadline by a few weeks.
Boehner is due to meet with his rank-and-file Republicans in the House on Tuesday to gauge their willingness to support a deal that would contain income tax increases on top earners - something that the party has long vowed to reject.
Boehner's latest proposal calls for $1 trillion in new tax revenue, $400 billion less than the White House wants.
Republicans understand that the clock is ticking and they are confident that Boehner will get a deal they can support in the coming days, a senior House Republican aide said.
Boehner "won't sign off on a deal that doesn't have enough votes to get through," the aide said.
Republicans want substantial spending cuts in return for increased tax revenue, but Democrats have resisted cuts to popular benefit programs like Medicare, the health program for seniors. Any proposal to trim benefits will face fierce resistance from liberal Democrats, whose votes will be needed to get a deal passed.
Obama also wants to head off another confrontation over the government's debt limit, which will need to be raised in the coming months. Republicans insist that any increase in the government's $16.4 trillion borrowing authority must be paired with an equal reduction in spending.
(Additional reporting by Richard Cowan and Jeff Mason in Washington and Gabriel Debenedetti in New York; Writing by Andy Sullivan; Editing by Alistair Bell)