IMF denies in Italy aid talks (Reuters)

By James Mackenzie and Francesca Landini James Mackenzie And Francesca Landini – Mon?Nov?28, 3:56?am?ET

ROME (Reuters) – Italy's prime minister faces a testing week as he seeks to shore up the country's strained public finances, with an IMF mission expected in Rome and market pressure building to a point where outside help may be needed to stem a full-scale debt emergency.

However, an IMF spokesperson poured cold water on a report in the Italian daily La Stampa that said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.

"There are no discussions with the Italian authorities on a program for IMF financing," an IMF spokesperson said.

Adding to international pressure on euro zone leaders to stem the debt crisis, U.S. President Barack Obama will press senior European Union officials in Washington on Monday to reach a solution to the emergency that Moody's said now threatens the credit standing of all European government bond ratings.

After slumping last week, Asian shares and the euro rose on Monday on hopes that some measures may emerge this week to ease the crisis.

Euro zone finance ministers will meet on Tuesday to consider detailed rules to boost the impact of a 440-billion-euro rescue fund.

Germany and France are also exploring radical ways to secure deeper and more rapid fiscal integration among the bloc's 17 countries to shore up the region's defenses against the debt crisis.

Italian Prime Minister Mario Monti is expected to unveil measures on December 5 that could include a revamped housing tax, a rise in sales tax and accelerated increases in the pension age. But pressure from the markets could force him to act more quickly.

One source with knowledge of the matter said contacts between the International Monetary Fund and Rome had intensified in recent days as concern has grown that German opposition to an expanded role for the European Central Bank could leave Italy without a financial backstop if one were needed.

The IMF inspection team is expected to visit Rome in the coming days but no date has been announced.

EYE OF THE STORM

Italy is in the eye of the euro zone debt storm after its borrowing costs returned to the levels that triggered the collapse of former Prime Minister Silvio Berlusconi's center-right government. Yields on 10-year bonds ended last week at more than 7.3 percent.

Italian yields are now in the territory that forced Greece, Ireland and Portugal to seek international bailouts and an auction on Tuesday of up to 8 billion euros of BTP bonds will be a crucial test.

On Friday, Italy paid a euro lifetime high yield of 6.5 percent to sell new six-month paper, a level that analysts said cannot be maintained for long without pushing a public debt amounting to 120 percent of gross domestic product out of control.

European Central Bank member Christian Noyer said on Monday that Italy's economy was fundamentally sound and Rome should be able to restore market confidence if it shows fiscal discipline.

"Italy should not be considered a weak economy," Noyer told reporters on a visit to Tokyo.

Italy, the euro zone's third biggest economy, would be far too big for existing bailout mechanisms and default on its 1.8 trillion euro debt would cause a banking and financial crisis that would probably destroy the single currency.

It has more than 185 billion euros of bonds falling due between December and the end of April. Obama was due to hold talks on Monday with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, although no breakthroughs were expected.

The president was expected to reiterate he was confident that Europe's leaders could handle the crisis, which is emerging as a major worry for the 2012 U.S. elections, if they show political leadership.

Moody's warned in a report that it may take a series of shocks before the political impetus for a resolution to the debt crisis finally emerges. The crisis had deepened in recent weeks, it said.

"The probability of multiple defaults (in addition to Greece's private sector involvement program) by euro area countries is no longer negligible," it said.

Civil servants from Germany and France were exploring ways for more rapid fiscal integration after the realization that getting an agreement among all 27 countries in the EU will be difficult any time soon.

An agreement among just the euro zone countries is one option.

"The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that," German Finance Minister Wolfgang Schaeuble told ARD television on Sunday.

Another option being explored is a separate agreement outside the EU treaty that could involve a core of around 8-10 euro zone countries, officials say.

PRESSURE

Monti outlined the broad thrust of his reform plans earlier this month, promising a mix of budget rigor and reforms to stimulate economic growth, and has stuck to Berlusconi's pledge to balance the budget by 2013.

But with growing signs that Italy's chronically sluggish economy could be entering recession, he has come under pressure to provide concrete details quickly.

The measures outlined so far are broadly in line with directions previously given by the ECB, but there have been no detailed discussions with international bodies on the kinds of conditions normally attached to IMF assistance programs.

As well as loosening job protection measures, privatizing local services and opening up professions to more competition, additional budget measures estimated by Italian media at up to 15 billion euros could be announced.

Monti can take some comfort from surveys showing broad popular support for his technocrat government, but austerity measures have yet to bite deeply and surveys also show a mixed picture on individual austerity measures.

On pensions, the government is expected to bring forward an already-planned increase in retirement ages, with a wider reform possible in the coming weeks.

Monti may reintroduce a housing tax that was scrapped by Berlusconi in a last-minute campaign pledge before the 2008 election. The move cost the Treasury an estimated 3.5 billion euros a year.

Other ideas under consideration include raising the value-added tax band in bars and restaurants, which currently stands at 10 percent.

(Additional reporting by Gavin Jones and Steve Scherer and Lesley Wroughton in Washington; Ian Chua in Sydney and Stanley White and Rie Ishiguro in Tokyo; Editing by David Stamp, Alessandra Rizzo and Alex Richardson)

Jackson doctor's girlfriend talks calls, shipments (AP)

By LINDA DEUTSCH, AP Special Correspondent Linda Deutsch, Ap Special Correspondent – Tue?Oct?4, 2:59?pm?ET

LOS ANGELES – Prosecutors on Tuesday called the girlfriend of the doctor charged in Michael Jackson's death to detail the physician's busy schedule on the day the singer died and her own interactions with the late King of Pop.

Nicole Alvarez told jurors during the involuntary manslaughter trial of Dr. Conrad Murray that the doctor had first told her that he was Jackson's personal physician for a year before the singer's June 2009 death.

Alvarez beamed as she described meeting Jackson for the first time in Las Vegas, where Murray maintains a medical practice.

"I was speechless," Alvarez said. "I couldn't believe I was meeting Michael Jackson."

Alvarez said she and Murray met Jackson several other times, including after the birth of the couple's young son.

Prosecutors also asked Alvarez, 29, about shipments that Murray had sent to her Santa Monica, Calif. apartment. She admitted receiving the items, but never opening them. Authorities contend the shipments contained the anesthetic propofol, which Murray was giving to Jackson as a sleep aid.

Authorities accuse the Houston-based cardiologist of giving Jackson a lethal dose of propofol and other sedatives in the bedroom of the singer's rented mansion. Murray's attorneys claim Jackson took the fatal dose himself.

In opening statements, a prosecutor said Murray had received more than four gallons of propofol while working with Jackson.

Murray has pleaded not guilty.

The doctor told police after Jackson's death that he was giving the singer propofol as a sleep aid.

Alvarez said after April 2009, Murray would frequently leave her apartment at night and return early the next day. She said she knew Murray was working as Jackson's personal doctor while the singer prepared for a series of comeback concerts.

Phone records displayed in court Monday showed Murray called Alvarez four times the afternoon of Jacksons' death in 2009, including once while he was in the ambulance with Jackson's lifeless body on the way to the hospital.

For two days, prosecutors kept jurors focused on the doctor's phone records from the day Jackson died, attempting to show that Murray was trying to juggle his medical practice, personal life and superstar patient all at the same time.

With Alvarez and another witness, pharmacy owner Tim Lopez, the case shifted its focus to propofol.

Lopez told jurors Murray first contacted him about obtaining a skin lightening cream used to treat vitiligo, a pigment condition Jackson had, but that by early 2009 he was inquiring about propofol.

Earlier Tuesday, a woman who was speaking on the phone with Murray on the day the singer died said the call was interrupted and the physician was no longer paying attention to her.

Sade Anding said she heard voices, coughing and mumbling on Murray's end of the line. She told jurors that it sounded like his cell phone was in his pocket. Anding said Murray called her at 11:51 a.m. on June 25, 2009. About five or six minutes into their call is when she noticed Murray was no longer paying attention.

"There was a pause," Anding said. "That's when I realized he was no longer on the phone."

"I heard mumbling of voices, it sounded like the phone was in his pocket," she said. "I heard coughing, and nobody answered."

With the exception of Alvarez, witnesses who testified about the phone calls Murray made have been relatively brief, but have filled in the government's timeline of Murray's actions in the hours leading up to Jackson's death.

The phone records have revealed the special relationship Murray kept with his patients.

Houston-based Dr. Joanne Prashad told jurors she called Murray the morning of Jackson's death to inquire whether it would be safe to operate on a patient whom Murray had treated. Prashad said she was surprised that Murray remembered the patient and the exact dosage of medicine that he was taking.

Murray's lead defense attorney Ed Chernoff asked Prashad whether Murray's recall was unusual for a doctor.

She said yes. "I was impressed," Prashad said.

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AP Special Correspondent Linda Deutsch contributed to this report.

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Anthony McCartney can be reached at http://twitter.com/mccartneyAP

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China says didn't know of arms sales talks with Gaddafi forces (Reuters)

BEIJING (Reuters) – Chinese arms firms held talks with representatives of Muammar Gaddafi's beleaguered forces in July over weapons sales, but behind Beijing's back, the Chinese Foreign Ministry said on Monday.

The revelation is nonetheless likely to deal a fresh blow to China's already delicate relations with Libyan rebel forces that have ousted Gaddafi.

The ministry confirmed the gist of reports in the Globe and Mail and the New York Times that documents found in the Libyan capital, Tripoli, indicated that Chinese companies offered to sell rocket launchers, anti-tank missiles and other arms with a total of some $200 million to Gaddafi's forces, despite a U.N. ban on such sales.

A ministry spokeswoman, Jiang Yu, said members of Gaddafi's government had come to China and held talks with a "handful" of Chinese arms company officials without the knowledge of the government.

"We have clarified with the relevant agencies that in July the Gaddafi government sent personnel to China without the knowledge of the Chinese government and they engaged in contact with a handful of people from the companies concerned," Jiang told a news briefing in Beijing.

"The Chinese companies did not sign arms trade contacts, nor did they export military items to Libya," Jiang said. "I believe that the agencies in charge of the arms trade will certainly treat this seriously."

Even if the arms talks were behind Beijing's back, the controversy could intensify mistrust between Beijing and the rebels seeking to defeat Gaddafi's shrinking forces and claim control of all Libya.

"We have hard evidence of deals going on between China and Gaddafi, and we have all the documents to prove it," a rebel military spokesman, Abdulrahman Busin, told the Times.

The arms issue comes on the heels of tensions between Beijing and the Libyan rebels over frozen funds.

On the weekend, the head of Libya's rebel National Transitional Council (NTC), Mustafa Abdel Jalil, said China had obstructed the release of some of Libya's frozen assets.

Although China agreed with other powers last week to unfreeze $15 billion of Libyan assets abroad, it opposed handing control of more to the interim ruling council, according to Libyan rebel spokesman Shamsiddin Abdulmolah.

"In principle, we don't have a problem" with unfreezing funds, said the Chinese spokeswoman Jiang.

"But out of a responsible attitude, we and some members of the Security Council want further explanation and information from the applicant countries about the uses of the funds and oversight of them," she said.

Libya's interim council has promised rewards for those who took a leading role in backing the revolt against Gaddafi, and that has raised concerns that China could be disadvantaged.

China is the world's second-biggest oil consumer and last year obtained 3 percent of its imported crude from Libya.

China did not use its U.N. Security Council veto power in March to block a resolution that authorized the NATO bombing campaign against Gaddafi's forces, but it condemned the expanding strikes and repeatedly urged compromise between his government and the rebels.

By the time of the visit by Gaddafi's officials, China was already courting the Libyan rebels. But China has not joined Western powers in formally recognizing the NTC as the legitimate authority in Libya, but has acknowledged its "important role" after Gaddafi's ousting.

The reports said Libyan security officials visiting China in July were received by three arms companies, including Norinco and the China Xinxing Import and Export Corporation.

Norinco has faced sanctions from the United States, which accused it of selling missile parts to Iran, in spite of Beijing's arms control rules.

Asked if the Chinese companies or their personnel could be punished over the talks with Gaddafi's officials, Jiang said: "I'm sure that the agencies in charge of Chinese arms (sales) will deal with this in a serious and conscientious way."

(Reporting by Chris Buckley; Editing by Nick Macfie)

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Rebels scorn talks with isolated Gaddafi (Reuters)

BENGHAZI, Libya (Reuters) – Rebels fighting to topple Muammar Gaddafi scorned reports of secret talks with the Libyan leader on Monday as their forces fought to secure gains and the United States said Gaddafi's days were numbered.

After 41 years of supreme power in his oil-rich desert state 69-year-old Gaddafi was isolated in the capital Tripoli, with reinvigorated rebel forces closing in from the West and South.

Libya's rebel National Transitional Council (NTC), recognized by many of the NATO nations whose air power is supporting their assault, denied any kind of negotiation with Gaddafi to resolve the six-month-old conflict.

"The NTC would like to affirm that there are no negotiations either direct or indirect with the Gaddafi regime or with the special envoy of the United Nations," said NTC leader Mustafa Abdel Jalil.

Gaddafi must step down and leave Libya, he said. "It is unthinkable to hold any negotiations or talks that disregard this basic principle."

In Washington, U.S. Defense Secretary Leon Panetta said Gaddafi's forces had been thrown back onto the defensive, and reports that a senior figure in the Libyan security apparatus had defected indicated the regime was cracking.

"Gaddafi's forces are weakened and this latest defection is another example of how weak they've gotten," Panetta said.

"I think the sense is that Gaddafi's days are numbered," Panetta said at event with Secretary of State Hillary Clinton.

Rebels fighting to topple Gaddafi seized two strategic towns near Tripoli over the past two days, cutting the city off from its supply lines and leaving the Libyan leader with a dwindling set of options if he is to stay in power.

However, pro-Gaddafi forces were mounting a fight-back in one of those towns, Zawiyah, west of Tripoli. Snipers concealed in tall buildings were picking off rebel fighters, and salvos of Russian-made Grad rockets landed in the town.

OBSOLETE

The Scud missile, an obsolete Soviet-era weapon, was fired on Sunday morning from near Sirte, Gaddafi's now isolated home town 500 km (310.7 miles) east of Tripoli.

It exploded to the east between the rebel-held towns of Brega and Ajdabiyah, said a U.S. official. The missile came down in the desert, injuring no one, said the official, who was speaking on condition of anonymity.

There was no immediate comment from Tripoli.

Analysts said using the inaccurate Scud look like an act of desperation. "It's an obvious sign that the regime's back is to the wall," said Shashank Joshi, Associate Fellow at Britain's Royal United Services Institute.

Scuds have a range of about 185 miles. At rebel headquarters in Benghazi, officials said it was probably aimed at rebel forces near Ajdabiyah.

"Gaddafi troops are using his last gun. He's crazy," said Mohammad Zawawi, media director for rebel forces. "We're scared he'll use chemicals. That's why we're trying to end this war and we hope to end it with the least number of casualties."

"We can't prevent the Scuds but we hope NATO can. NATO has the technology to detect them."

Analysts say the rebel strategy is to isolate Tripoli and hope the government collapses, but they say it is also possible Gaddafi will opt to stage a last-ditch fight for the capital.

In a barely audible telephone call to state television in the early hours of Monday, Gaddafi called on his followers to liberate Libya from rebels and their NATO supporters.

"Get ready for the fight ... The blood of martyrs is fuel for the battlefield," he said.

REBEL PUSH

As he spoke rebels were making their most dramatic advances in months of fighting, shifting the momentum in a conflict that had been largely static and was testing the patience of NATO.

Rebel forces southwest of Tripoli surged forward at the weekend to enter Zawiyah about 50 km (30 miles) west of Tripoli straddling the main highway linking the capital to Tunisia.

A day later, they said they had taken the crossroads town of Garyan, which controls the highway south from Tripoli linking it to Sabha, a Gaddafi stronghold deep in the desert.

"Gaddafi has been isolated. He has been cut off from the outside world," a rebel spokesman from the Western Mountains, called Abdulrahman, told Reuters by telephone.

Tripoli officials deny the rebels control Zawiyah, and say their forces are preparing to drive "armed gangs" from Garyan.

Rebels on the outskirts of Zawiyah said most of Gaddafi's forces had pulled out of the town, but left behind snipers who made it dangerous for the anti-Gaddafi fighters to move around.

A Reuters reporter saw a rebel pick-up truck deliver six government soldiers to a makeshift prison. Each was blindfolded and made to kneel facing a wall and several rebels walked by, shouting at them and slapping them on the head.

"They were firing at us," said Abdel-Muiz Ramadan, 20, a rebel fighter. "We captured one of them and he gave us the location of the others."

He said the snipers were concentrated in tall buildings around Martyrs' Square, focus of a failed revolt by Zawiyah residents earlier this year. "Every time we approach the area, one of their snipers fires at us," said Ramadan.

Medical workers at one of the town's hospitals said 20 people, a mixture of rebel fighters and civilians, were killed on Monday, and the death toll for Tuesday had reached one.

A U.N. peace envoy in neighbouring Tunisia, Abdel Elah al-Khatib, said he knew nothing of any negotiations in Djerba.

He said he had held informal talks with representatives of Gaddafi's government and the rebel council but did not say who they were or what they discussed.

Talks could signal the endgame of a civil war that has drawn in the NATO alliance and emerged as one of the bloodiest confrontations in the wave of unrest sweeping the Arab world.

Rebels may still lack the manpower for an all-out assault on Tripoli, but are hoping their encirclement of the capital will bring down Gaddafi's government or inspire an uprising. In the past, however, they have frequently failed to hold gains, and a fightback by Gaddafi troops could yet force them back.

(Additional reporting by Michael Georgy in Zawiyah, Libya, Phil Stewart in Washington, Missy Ryan in Tripoli, Ulf Laessing in Ras Jdir, Tunisia, Hamid Ould Ahmed in Algiers and William Maclean in London; Writing by Christian Lowe and Douglas Hamilton; Editing by Jon Boyle)

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45K Verizon workers strike after labor talks fail (AP)

NEW YORK – Thousands of Verizon Communications Inc. workers are on strike from Massachusetts to Washington, D.C., over labor issues.

Dozens of people wearing red shirts and carrying signs have gathered outside Verizon's headquarters in New York City on Sunday. They're carrying signs saying they're "on strike for middle-class jobs."

The company is asking for changes in their contract including employee contributions to health care.

The 45,000 workers went on strike after their contract expired at midnight Saturday. That contract covers the company's division that oversees landlines and Internet networks.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

Forty-five thousand Verizon Communications Inc. workers from Massachusetts to Washington, D.C., went on strike Sunday after negotiations fizzled over a new labor contract for more than a fifth of the company's work force.

Verizon is the nation's largest wireless carrier, but the contract that expired at midnight Saturday covers workers in the company's wireline division, which includes landline operations, services for businesses and governments and long-haul wholesale traffic.

Talks in Philadelphia and New York stalled Saturday night after Verizon continued to demand more than 100 concessions from workers regarding health care, pensions and work rules, said the Communications Workers of America.

CWA workers picketed at Verizon headquarters in New York City on Sunday morning, wearing red and holding signs with messages including "CWA on strike for middle-class jobs."

Mark C. Reed, Verizon's executive vice president of human resources, called the outcome of the unions' actions "regrettable" for customers and employees.

"We will continue to do our part to reach a new contract that reflects today's economic realities in our wireline business and addresses the needs of all parties," he said in a statement.

Workers covered by the expired contract include 10,000 represented by the International Brotherhood of Electrical Workers, who serve as telephone and repair technicians, customer service representatives, operators and more. Contract negotiations began June 22.

"Even at the 11th hour, as contracts were set to expire, Verizon continued to seek to strip away 50 years of collective bargaining gains for middle-class workers and their families," CWA said in a statement Sunday.

New York-based Verizon has 196,000 workers; 135,000 are non-union.

The CWA said the concessions are unjustified and harsh, given that Verizon is highly profitable — the company's revenue rose 2.8 percent to $27.5 billion in the second quarter. Its growth was largely attributed to its wireless business.

But Verizon said its wireline business has been in decline for more than a decade as more people switch to using cellphones exclusively. It had 25 million landlines at the end of the second quarter, down from 26 million at the end of 2010. It has been selling off some of its landlines to other phone companies.

The company is asking for changes in the contract to strengthen the unit. It said union employees contribute nothing to their health care premiums.

Verizon activated a contingency plan to ensure customers experienced "limited disruption in service" for the length of the strike.

"Tens of thousands of Verizon managers and other personnel have been trained to step in and perform emergency work assignments," Verizon spokesman Rich Young said.

Lowell McAdam, the former head of Verizon Wireless, became CEO of Verizon Communications Inc. on Aug. 1, replacing Ivan Seidenberg. Seidenberg, the longtime CEO, remains chairman of the company.

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NKorean official to go to US for nuclear talks (AP)

By MATTHEW LEE and FOSTER KLUG, Associated Press Matthew Lee And Foster Klug, Associated Press – 1?hr?43?mins?ago

BALI, Indonesia – A senior North Korean official will visit the United States this week to discuss the possible resumption of long-stalled international negotiations on ending Pyongyang's nuclear programs, U.S. Secretary of State Hillary Rodham Clinton said Sunday.

The news that diplomats could be close to reviving six-nation disarmament talks that broke off in 2008 comes after more than a year of animosity and high tension between the rival Koreas and raises hopes in a region on edge. Two attacks Seoul blames on Pyongyang last year killed 50 South Koreans and led to threats of war.

Clinton's invitation for North Korean Vice Foreign Minister Kim Kye Gwan to visit New York follows a crucial meeting Friday between nuclear negotiators from North and South Korea on the sidelines of a regional forum of the Association of Southeast Asian Nations, in Bali. It was the first such meeting since disarmament talks collapsed in 2008, and the envoys agreed to work toward the resumption of six-nation negotiations.

The recent diplomacy comes after more than a year of hardline unity by Washington and Seoul since international investigators said a North Korean torpedo sank a South Korean warship in March of last year, killing 46 sailors. The South demanded the North show regret for the warship sinking and an artillery attack on a front-line South Korean island that killed four in November.

North Korea denies a role in the sinking and says South Korea provoked the island shelling. While refusing to apologize, however, Pyongyang has repeatedly shown a willingness to return to the disarmament talks. The North is seen as needing a diplomatic breakthrough and outside food aid ahead of the 2012 centennial of the birth of the country's founder, Kim Il Sung.

"We are open to talks with North Korea, but we do not intend to reward the North just for returning to the table," Clinton said in a statement announcing Kim Kye Gwan's trip to the U.S. "We will not give them anything new for actions they have already agreed to take. And we have no appetite for pursuing protracted negotiations that will only lead us right back to where we have already been."

The wariness is in line with past U.S. statements that ally Seoul must be satisfied with the North's sincerity before Washington will act.

During Kim's trip, he will meet with a team of U.S. officials to explore his country's commitment to returning to the international talks and taking concrete steps toward disarmament, Clinton said in the statement.

It was unclear what days Kim, the North's former chief nuclear envoy, will visit New York. The announcement follows an earlier meeting between Clinton and the foreign ministers of South Korea and Japan in Bali.

The nuclear negotiations involve the two Koreas, the U.S., China, Japan and Russia.

North Korean Foreign Minister Pak Ui Chun said in comments released Sunday by the country's state media that the Korean peninsula now stands "on the crossroads of detente and the vicious cycle of escalating tension."

The countries involved, Pak said, must "make the best use of (the) opportunity of dialogue and make a bold decision to settle the fundamental issue."

Diplomats have been eager for the two rivals to ease tensions.

Since the last round of talks, North Korea has conducted a second nuclear test and revealed a uranium enrichment facility that could give it another way to make atomic bombs.

Recent North Korean threats against Seoul's conservative government include a pledge to retaliate over South Korean soldiers' use of pictures of the ruling North Korean family for target practice.

The two Koreas remain in a technical state of war because their three-year conflict ended in a truce, not a peace treaty, in 1953. The United States has 28,500 troops in the South. That presence is cited by the North as a main factor behind its need to build a nuclear program.

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Klug reported from Seoul, South Korea.

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Online:

State Department background on North Korea: http://www.state.gov/p/eap/ci/kn/

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Debt talks get messy as deadline looms (Reuters)

WASHINGTON (Reuters) – Facing a looming deadline to avoid a default, Republican and Democratic lawmakers on Wednesday worked to combine elements of a plan to raise the debt ceiling with market-pleasing proposals to cut spending.

An ambitious new deficit reduction plan, unveiled on Tuesday by a group of senators known as the "Gang of Six," offers a ray of hope in an increasingly grim standoff that has threatened the United States' top-notch credit rating.

Congress must approve an increase in the $14.3 trillion U.S. debt ceiling by August 2 or the government will run out of money to pay its bills. Republicans and Democrats agree that spending cuts should accompany a debt-limit increase to tame mounting debt but have been unable to agree on the details.

White House talks on a comprehensive deficit-reduction deal stalled over tax increases, which Republicans still rule out.

President Barack Obama will meet with the Democratic leadership of the Senate and the House of Representatives at 2:50 p.m. EDT (1850 GMT) on Wednesday to discuss progress on the debt negotiations, the White House said.

Lawmakers have been scrambling to find a solution, and there is no single plan. The best option remains the one first billed as a backup, which passes responsibility, authority and potentially blame for raising the debt ceiling to Obama.

That might not be enough for Wall Street. The stalemate on debt talks has shaken global markets, and credit rating agencies have said that even if lawmakers raise the debt limit in time, America's top-notch triple-A credit rating will still be under pressure without a broad deficit-reduction plan.

Congressional leaders are looking to the Gang of Six plan for a way out of the impasse. A more modest proposal may be needed to avert default by August 2, but the $3.75 trillion Gang of Six plan could help lawmakers reach a broader deal shortly after that to address long-term fiscal problems and alleviate credit raters' concerns.

Initial reaction was positive. Obama seized on the plan as a "very significant step" on Tuesday and urged congressional leaders to start discussing it. Senators from both parties embraced it while Republican leaders in the House said it contained some good elements.

Investors welcomed the plan on Tuesday, driving up the price of 30-year Treasury bonds sharply and pushing global stocks higher. But on Wednesday, bond prices eased as Wall Street realized the road ahead remains long.

"We think that an agreement will be made, with a smaller package tied to an extension (of the debt limit) to the end of 2011 or even 2012, leaving the difficult decisions on entitlement reform or tax increases postponed to later in the year or more likely after the November 2012 election," said Carl Leahey, senior economist at Decision Economics.

An analyst from Fitch Ratings said it was encouraging that progress appeared to be being made on a substantial U.S. deficit-reduction deal and said the credibility of the bipartisan plan was as important as the overall savings amount.

(Additional reporting by Thomas Ferraro and Alister Bull; Writing by Deborah Charles; Editing by Will Dunham and Eric Beech)

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Obama eyes more deficit talks (Reuters)

WASHINGTON (Reuters) – President Barack Obama will decide on Saturday whether to summon lawmakers for a new round of debt and deficit talks, weighing the chances of progress as both sides stick to their positions on spending and taxes.

Congress must raise the $14.3 trillion limit on U.S. borrowing by August 2 or the government will run out of money to pay its bills, causing turmoil in global financial markets and potentially forcing the United States into another recession.

The top two Republicans in the House of Representatives, John Boehner and Eric Cantor, met on Friday with Treasury Secretary Timothy Geithner and Bill Daley, the White House chief of staff.

But prospects for a deal anytime soon appear unlikely, as the House and Senate were expected to spend much of next week debating measures that have little chance of becoming law.

Republicans want a deficit-cutting deal in order to raise the debt limit, but they disagree with Democrats on how to do it. The White House wants some tax increases on wealthier Americans to be part of a package; Republicans reject that.

"The truth is, you can't solve our deficit without cutting spending," Obama said in his weekly radio and Internet address on Saturday.

"But you also can't solve it without asking the wealthiest Americans to pay their fair share -- or without taking on loopholes that give special interests and big corporations tax breaks that middle-class Americans don't get."

The House is expected next Tuesday to pass a bill that would raise the debt ceiling by the $2.4 trillion Obama has requested as long as Congress adopted a balanced budget amendment -- an unlikely prospect.

Republican Senator Orrin Hatch has lined up every Senate Republican behind a balanced-budget measure. It is expected to fail in the Democratic-controlled chamber next week.

"Only by restoring constitutional restraints on the ability of Congress to spend, can we constrain the growth of the federal government," he said in the weekly Republican address.

"The solution to a spending crisis is not tax increases. Yet, Washington has consistently demonstrated that it cannot control its urge to spend."

As the two sides bicker, the consequences of inaction are looming. Ratings agencies Moody's and Standard & Poor's have signaled they may cut the gold-plated U.S. credit rating if the borrowing limit is not raised and deficit-reduction measures are not laid out.

BACK TO THE TABLE?

The White House and congressional leaders have tried to reassure markets that the United States would not default on its debt.

A backup plan put forward by Senate Republican Leader Mitch McConnell may be the solution all sides embrace if a big deal cannot be reached.

McConnell's plan would essentially allow Democrats to raise the debt ceiling without Republican help, and Senate Democratic Leader Harry Reid has cautiously embraced it. The plan could include about $1.5 trillion in spending cuts and set up a panel to find further savings. The Senate could vote on it late next week, but it remains unpopular with House Republicans.

"The idea itself is stupid," Republican Representative Jason Chaffetz told Fox News. "The people that have been there, the so-called adults in the room, have been there too long. And that's why we're in this problem."

On Thursday evening Obama gave lawmakers a Saturday deadline to come up with a plan to go forward. He could call for further talks on Saturday or Sunday if needed.

The president warned on Friday that inaction could lead to higher borrowing costs for ordinary Americans -- "effectively a tax increase on everybody," he said.

"Whether you're using your credit or you're trying to get a loan for a car or a student loan, businesses that are trying to make payroll, all of them could end up being impacted as a consequence of a default," Obama said.

(Additional reporting by Laura MacInnis, Steve Holland and Mari Saito; Editing by Paul Simao and Eric Beech)

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Debt talks grind on, clock ticks toward default (AP)

WASHINGTON – Budget talks between President Barack Obama and his GOP rivals are at a frustrating standstill, leading a top Republican to launch a long-shot proposal to give Obama sweeping new powers to muscle through an increase in the government's debt limit without the approval of a bitterly divided Congress.

Lawmakers return to the White House Wednesday for their four negotiating session with the president in as many days. Obama has said the daily meetings will continue until a deal is reached.

A two-hour session Tuesday produced no progress after a day of poisonous exchanges between Democrats and Republicans.

Senate GOP leader Mitch McConnell of Kentucky offered a backup plan that would, in effect, guarantee Obama requests for new government borrowing authority unless Congress musters veto-proof majorities to deny him. McConnell said he was forced to introduce the plan because he didn't see a path to an agreement so long as Democrats insist on revenue increases.

McConnell said Wednesday that his proposal was a "last resort if the president continues to shirk his duties to do something about our dire fiscal situation."

"Make the president show in black and white the specific cuts he claims to support. If he refuses he'll have to raise the debt ceiling on his own," McConnell said on the Senate floor. "But he's not going to get Republicans to go along with that."

McConnell's proposal immediately ran into stiff opposition among tea party conservatives and seemed unlikely to pass the House, but neither the White House nor House Speaker John Boehner, R-Ohio, dismissed it out of hand.

"I think everybody agrees there needs to be a backup plan if we can't come to an agreement," Boehner said in a Fox News Channel interview Tuesday afternoon. "And frankly, I think Mitch has done good work."

Under McConnell's proposal, Obama could request — and likely secure — increases of up to $2.5 trillion in the government's borrowing authority in three separate installments over the coming year as long as he simultaneously proposed spending cuts of greater size.

The debt limit increases would take effect unless blocked by Congress under special rules that would require speedy action — and even then Obama could exercise his authority to veto such legislation. But the president's spending would have no guarantee of receiving a vote.

"The American people elected (McConnell) to serve as a check on Obama's appetite for out-of-control spending, not to write him a blank check to continue the binge," said conservative activist Brett Bozell. "It's these sort of shenanigans that got Republicans thrown out of power in 2006."

Tea party favorite Sen. Jim DeMint, R-S.C., asked about McConnell's plan Wednesday on CBS' "The Early Show," said, "Republicans weren't elected last November to make it easier to spend and borrow and add to our debt."

GOP presidential candidate Newt Gingrich wrote on Twitter, "McConnell's plan is an irresponsible surrender to big government, big deficits and continued overspending."

Republicans, meanwhile, continued pushing for a balanced budget amendment that would require Washington to balance its books. McConnell said politicians in Washington have showed they can't get the job done, and "If the president won't do something about the debt we'll go around him and take it to the American people."

McConnell made his proposal public a few hours before Obama presided Tuesday over his third meeting in as many days with congressional leaders searching for a way to avoid a default and possible financial crisis.

Democratic officials who participated in the session said Obama did not reject McConnell's idea, but said it's not his preferred approach. A statement issued later by press secretary Jay Carney said the president "continues to believe that our focus must remain on seizing this unique opportunity to come to agreement on significant, balanced deficit reduction."

McConnell's plan was hatched out of frustration that Congress and Obama are deadlocked as the clock ticks toward an Aug. 2 deadline for a market-rattling default on U.S. obligations. McConnell said he still hoped a deal could be reached, but that a backup plan would show the markets and public that default is not an option.

Republicans are demanding $2 trillion-plus in budget cuts as the price for a commensurate increase in the government's ability to continue to borrow more than 40 cents of every dollar it spends. Both Republicans and Obama see the politically toxic debt limit vote as a way to seize an opportunity to cut future deficits — a move that would seem to be to the political benefit of both sides.

But GOP refusals to consider devoting any new revenue from closing tax loopholes — like those enjoyed by oil and gas companies — to cutting the deficit has led Democrats to withhold further spending cuts beyond a handful tentatively agreed to during several weeks of talks led by Vice President Joe Biden in May and June. For their part, Republicans say the White House is offering minuscule spending cuts in the near term and is pulling back from some tentative agreements on topics like requiring federal workers to contribute more to their pensions.

Staffers were meeting at the White House Wednesday morning to work out agreements on specific cuts discussed during those earlier Biden-led talks. The meeting with Obama, Biden and congressional leaders later Wednesday was expected to build on those discussions.

Obama himself upped the stakes Tuesday, telling CBS News anchor Scott Pelley that more than $20 billion in Social Security checks could be held up.

"I can't guarantee that the checks will go out Aug. 3 if we haven't resolved this," Obama said. "There may simply not be the money in the coffers to do it."

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More talks on US debt impasse scheduled (AFP)

WASHINGTON (AFP) – US President Barack Obama convened a second consecutive day of crisis national debt talks Monday, but a polarized Washington appeared far from a deal to stave off a catastrophic default.

Obama met Sunday evening with congressional leaders, including Republican House Speaker John Boehner, but 75 minutes of talks failed to unblock an impasse that reaches right to the heart of America's ideological divide.

Republicans are refusing to raise the $14.29 trillion US debt limit unless Obama first agrees to curb the ballooning budget deficit, in part by cutting costly government-funded social welfare programs.

The president and Democrats say they are willing to make some cuts to the so-called entitlement programs but want the Republicans to meet them half way by allowing tax hikes for millionaires and billionaires to increase revenue.

The White House said shortly after Sunday's discussions concluded that Obama would meet congressional leaders again on Monday -- at a time to be decided -- after holding a 1500 GMT press conference on the crisis.

Asked as he went into Sunday's talks if the warring politicians would reach a deal in the next 10 days to prevent the US from defaulting on its debt obligations, Obama replied: "We need to."

But statements issued after the talks by the parties' respective Senate leaders, Mitch McConnell for the Republicans, Harry Reid for the Democrats, offered no clue as to how that breakthrough might be achieved.

"It's baffling that the president and his party continue to insist on massive tax hikes in the middle of a jobs crisis while refusing to take significant action on spending reductions at a time of record deficits," McConnell said through his spokesman.

"Senator Reid believes the stakes are too high for Republicans to keep taking the easy way out, and he is committed to meeting every day until we forge a deal, however long that takes," his spokesman said.

Before Sunday's White House meeting, Boehner and McConnell warned they might abandon efforts to reach a larger, comprehensive debt reduction deal because Obama and the Democrats insisted on raising taxes on the wealthy.

The Republican move would leave negotiators aiming at a less ambitious framework, striving to save about $2.4 trillion over the next decade instead of the $4 trillion still sought by the Democrats.

The talks are part of a final major push to reach a deal to raise the congressionally determined limit on US borrowing, now set at $14.29 trillion, in the face of a budget deficit expected to hit $1.6 trillion this year.

The US hit the ceiling on May 16 but has since used spending and accounting adjustments, as well as higher-than-expected tax receipts, to continue operating without impact on government obligations.

By August 2, though, the government will have to begin withholding payments to bond holders, civil servants, retirees or government contractors, and the White House has urged a deal by July 22 to have time for Congress to pass it.

Economists warn that if the United States defaults, it could lose its ability to borrow, souring fraught financial relations with creditors like China and sending the already sour global economy into a tailspin.

The warning was repeated Sunday by New IMF chief Christine Lagarde who told ABC News that a US debt default "would jeopardize the stability at large."

But Boehner faces pressure from Republicans close to the archconservative "Tea Party" movement to reject any compromise that raises taxes, something he has already publicly ruled out.

Republican Senator Jim DeMint of South Carolina said he believed the negotiators should not attribute excessive importance to the August 2 deadline.

"There would certainly be disruption, but this is not a deadline that we should rush and make a bad deal," DeMint said on "Fox News Sunday.

Obama faces pressure from Democrats outraged he might agree to cuts in the fraying US social safety net, notably to the Medicare health program for the elderly and disabled, and to Social Security retirement benefits.

The discussions are sure to shape Obama's 2012 reelection bid, which will likely turn on voters' assessment of his handling of the economy as it claws its way out of the worst recession since the Great Depression of the 1930s.

On Friday the US Labor Department said the ailing US economy, still digging out from the 2008 global meltdown, had generated a paltry 18,000 jobs in June and the unemployment rate had ticked up to 9.2 percent.

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Taxes still a stumbling block in debt talks (Reuters)

WASHINGTON (Reuters) – After months of effort, President Barack Obama and congressional Republicans are right back where they started as they try to avert a looming debt default: arguing over taxes.

With a "grand bargain" to tame the national debt seemingly off the table, Obama, House of Representatives Speaker John Boehner and other leaders will try for a more modest deal when they resume discussions at the White House Monday afternoon.

But negotiators will have to confront a divide over taxes that has prevented them from reaching a deal so far. Democrats say new tax revenues need to be part of the equation, while Republicans say they won't back any increase in taxes.

A highly anticipated Sunday meeting broke little new ground. Obama and his fellow Democrats repeated the need for a "balanced" approach, while Republicans restated their position that tax increases would further burden the already shaky economy. Senate Democratic Leader Harry Reid lectured Republicans for backing away from tough decisions, sources said, while Boehner was largely silent.

A source familiar with the meeting described it as a "frank exchange of views" -- Washington-speak for "acrimonious."

The post-meeting rhetoric seemed to bear this out.

"It's baffling that the President and his party continue to insist on massive tax hikes in the middle of a jobs crisis," said Don Stewart, a spokesman for Senate Republican Leader Mitch McConnell.

Reid's spokesman, Adam Jentleson, said: "The stakes are too high for Republicans to keep taking the easy way out."

Time is running short to break the impasse.

The Treasury Department has warned that it will run out of money to cover the country's bills if Congress does not raise the $14.3 trillion debt limit by August 2. Failure to do so could push the country back into recession, send shock waves through global markets and threaten the dollar's reserve status.

The real deadline is even closer. Participants say a deal should be in place July 22 to ensure Congress has time to act. Obama told lawmakers to be ready to meet every day this week.

But Senator Jim DeMint, a Republican aligned with the fiscally conservative Tea Party movement, said the threat of default was overblown.

"We're not going to default. We've got enough tax revenue to pay our bills," DeMint told NBC's "Today Show" on Monday.

"We don't need to panic and rush into a deal," he added.

If White House talks produce no plan this week, DeMint said Republicans would introduce a bill to raise the debt ceiling in exchange for "reasonable" spending cuts, caps and movement toward a balanced budget amendment.

TAXES SCUTTLE 'GRAND BARGAIN' AND SMALLER DEAL

Aides to Boehner and Obama had spent much of the past week discussing an ambitious budget deal that would have reformed the tax code and popular social spending programs and scaled back annual defense and domestic spending.

The goal was the $4 trillion in budget savings, measured over 10 years, that budget experts say is needed to keep the national debt at a sustainable level.

Obama wanted between $1.3 trillion and $1.7 trillion of that total to come from new tax revenue, according to a Republican source. That would have come in part by allowing the current lowered tax rate for the highest earners to rise back to its 1990s levels in 2013, while keeping the lower rates in place for middle- and low-income earners.

Republicans felt that what Democrats offered in return -- a promise to lower tax rates across the board while closing a range of tax breaks -- was not enough.

On Sunday, Obama and other Democrats pressed for the "grand bargain" but Republicans said they wanted a smaller deal.

With savings of around $2 trillion, that would cover the nation's borrowing needs through the November 2012 elections.

Many elements of that deal have already been hammered out in talks led by Vice President Joe Biden, but taxes proved to be a stumbling block in those sessions as well.

Representative Eric Cantor, the No. 2 House Republican, walked out June 23 after Democrats insisted on closing $400 billion worth of tax breaks that largely benefit the wealthy.

There could be a way out.

Last week, Cantor said he could support closing some tax breaks if they were offset with tax cuts elsewhere.

Democrats have proposed a range of tax cuts to boost the economy, including an extension of the current payroll tax cut and a permanent credit for research and development costs.

That approach would allow both sides to declare victory -- Republicans would get a deal that doesn't raise taxes overall, and Democrats could say they raised taxes on the rich and helped bring down the 9.2 percent unemployment rate.

(Additional reporting by David Morgan; Editing by Eric Beech)

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Obama faces new obstacles in high-stakes debt talks (Reuters)

WASHINGTON (Reuters) – President Barack Obama will seek "the biggest deal possible" in talks on Sunday aimed at averting a debt default after Republicans shied away from a $4 trillion deficit-reduction deal because it would raise taxes.

Obama and the top U.S. Republican, House of Representatives Speaker John Boehner, are to meet with other congressional leaders at 6 p.m. EDT (2200 GMT) at the White House for high-stakes deliberations with an August 2 deadline looming larger.

Failure to seal a deal by August 2 could mean the first-ever default on the nation's financial obligations, which the White House and private economists warn could push the United States back into recession and trigger global financial chaos.

Boehner, facing stiff opposition from fellow Republicans over the prospects of higher taxes as part of a large-scale $4 trillion budget deal, told the Democratic president on Saturday he would only pursue a smaller, $2 trillion package.

The move threatened to throw Sunday's meeting into disarray. It followed Democratic complaints to Obama -- whose 2012 re-election prospects are tightly linked to U.S. economic health -- that he should not agree to any reforms of popular entitlement programs that would lead to benefit cuts.

Calling it a "grave moment for the country," Treasury Secretary Timothy Geithner told NBC's "Meet the Press" that Obama and the Democrats would try to get the "biggest deal possible" and that failure to act could lead to catastrophic damage to the fragile U.S. economy.

"It's going to require both sides to compromise. The president's bringing both sides together again at the White House this evening to try to figure out how to move forward," he said.

White House chief of staff William Daley told ABC's "This Week With Christiane Amanpour" that "there's no question in my mind" that a default will be avoided. "I'm confident of that."

Daley said the White House believed a deal of around $4 trillion was needed to "send a statement to the world that the U.S. has gotten hold of their ... fiscal problems."

Aides to Obama and Boehner had been working on a far-reaching package of spending cuts and new revenue that would have reduced deficits by $4 trillion over 10 years and cleared the way for lifting the $14.3 trillion cap on the government's borrowing capacity.

DAMPENED HOPES

But Boehner's move dampened hopes of any immediate compromise and raised doubts about the chances that Sunday's talks would start moving the budget debate toward an end-game.

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes," Boehner, the top Republican in Congress, said in a statement. "I believe the best approach may be to focus on producing a smaller measure."

Senate Republican leader Mitch McConnell, appearing on "Fox News Sunday," said, "Nobody's talking about not raising the debt ceiling," and said he was "for the biggest deal possible too. It's just that we're not going to raise taxes in the middle of this horrible economic situation."

McConnell said he believed the sweeping $4 trillion package was off the table and suggested Republicans have an alternative idea to avoid a default up their sleeves.

Asked if there was a contingency plan to avoid a default, McConnell said with a smile: "There's always a contingency plan."

Conservatives believe deep spending cuts are needed to get the budget under control and are urging congressional Republicans not to bow to pressure for tax increases on the wealthy from Democrats, who want to shield popular domestic programs from huge cuts.

"This debt ceiling debate is the perfect time to do what must be done. We must cut," said former Alaska Governor Sarah Palin, the Republican vice presidential nominee in 2008.

Democratic Representative Chris Van Hollen, on CNN's "State of the Union," accused Republicans of taking an uncompromising stance -- "essentially providing a form of extortion, 'if you don't agree to deficit reduction the way we want it.'"

Republicans -- under pressure from Tea Party conservatives -- reject any increased taxes and want curbs on popular benefit programs such as Medicare, Medicaid and Social Security.

Republican Senator Jim DeMint, a Tea Party favorite, told Fox he believed Geithner was "playing Chicken Little here" with the default deadline. "The fact is, we will pay our debts if it's the last dollar we have."

(Additional reporting by Jim Wolf, Caren Bohan, Thomas Ferraro, Andrew Sullivan and Matt Spetalnick; Editing by Vicki Allen)

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Obama: Still differences on debt, new talks Sunday (AP)

WASHINGTON – Beset by a weak jobs report, President Barack Obama on Friday called for swift action by Congress to raise the nation's borrowing limit, saying the uncertainty over the debt ceiling has hindered hiring in the private sector.

In remarks in the White House Rose Garden, the president linked two of the most high profile issues facing his presidency — the weak economy and a massive budget deal to meet an Aug. 2 deadline to increase the debt limit.

"The sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised and that we have a serious plan to deal with our debt and deficit, the sooner that we give our businesses the certainty that will need in order to make additional investments to grow and hire," Obama said.

He made his remarks just hours after the government reported anemic job growth for June and a new, higher unemployment rate of 9.2 percent.

Obama said uncertainty over raising the debt ceiling — currently capped at $14.3 trillion — was one of several factors that have contributed to an economic slowdown and weaker job creation. He also listed natural disasters, high gas prices, state and local budget cuts and the fiscal crisis in Greece.

"The economic challenges we face weren't created overnight and they're not going to be solved overnight," he said.

Obama met Thursday with the top eight leaders of Congress and has called them back for a rare weekend meeting on Sunday. He met privately Friday morning with the top House Democrat, Nancy Pelosi, amid Democratic concerns over proposals to cut spending for Social Security, Medicare and Medicaid as part of the budget deal.

Obama and congressional negotiators are looking at closing some tax loopholes and cutting popular social benefit programs as they struggle to reach an agreement between Republicans and Democrats, but Pelosi and many House Democrats oppose cutting the benefit programs. Pelosi was getting an opportunity to air her views as she met privately with Obama.

"We are not going to balance the budget on the backs of America's seniors," Pelosi said Thursday.

The endgame on the debt talks was approaching as the Labor Department reported hiring slowed to a near-standstill in June. Employers added the fewest jobs in nine months and the unemployment rate rose for the third month in a row, climbing to its highest point this year.

That gave Republicans fresh ammunition to attack Obama's handling of the economy even as the shape of an agreement remained in doubt. All the while the nation is moving closer to an Aug. 2 deadline to raise the government's debt ceiling or face an unprecedented default on U.S. obligations that the administration warns could add a perilous new crisis on top of the already quavering economy.

Obama was pushing for an ambitious deficit reduction plan of roughly $4 trillion, the biggest of three options he laid on the table. It would require sizeable tax revenues, which many Republicans oppose, and spending reductions for entitlement programs, opposed by many Democrats. But the idea of a potentially historic deal was well received by the meeting participants, officials said later, even though the details remained in dispute.

After Thursday's 90-minute session, Obama said Democrats and Republicans should be prepared to show their bottom-line demands when they return to the bargaining table Sunday.

The negotiating stakes are high. Without a deal on deficit reduction, Republican leaders say they don't have enough GOP votes to increase the nation's borrowing authority, raising the danger of the first ever U.S. default on its debts when the current $14.3 trillion debt ceiling is tapped out.

"Everybody acknowledged that we have to get this done before the hard deadline of Aug. 2 to make sure that America does not default for the first time on its obligations," Obama said. "And everybody acknowledged that there's going to be pain involved politically on all sides."

That leaves little time to agree on 10-year deficit reductions of $2 trillion to $4 trillion.

The major clash centers on how to reduce spending on major entitlement programs such as Medicare, Medicaid and Social Security, all prized by Democrats, and on tax changes that would close loopholes and end certain corporate breaks. Republicans insist that any tax changes be used to lower rates on corporations and individuals; Obama wants them also to generate more tax revenue.

Increasing the debt ceiling through the end of 2012 — a date favored by the White House — would require authorizing about $2.4 trillion in additional borrowing. House Speaker John Boehner has insisted on a 10-year deficit reduction figure that, at a minimum, matches the amount of additional borrowing. One aide to a lawmaker in Thursday's meeting said Obama made it clear he wouldn't sign a budget and debt agreement that didn't extend the debt ceiling until after the November 2012 presidential election.

In the meeting, Obama told the leaders that they faced three options — a small deficit reduction plan, a medium plan that would reduce deficits by $2 trillion over 10 years or a big agreement that would shoot for up to $4 trillion in deficit reductions over the next decade. Obama indicated he preferred the largest number.

In the meeting, Boehner and Senate Minority Leader Mitch McConnell of Kentucky backed Obama's bigger, more ambitious goal, said Democratic officials familiar with the talks. Their lieutenants, Senate GOP Whip Jon Kyl of Arizona and House Majority Leader Eric Cantor of Virginia, indicated they believed the medium-size option was more realistic. Both Cantor and Kyl had participated in talks led by Vice President Joe Biden that had already identified about $2 trillion in deficit reduction.

The negotiations are politically difficult for both parties.

Raising the debt ceiling is unpopular with voters, especially those who vote Republican, increasing concern among GOP lawmakers that they could be challenged by fellow Republicans in primaries across the country.

The big entitlement programs such as Social Security, Medicare and Medicaid have long been protected by Democrats in Congress.

Underscoring the political stakes, the Pew Research Center reported Thursday that in a recent poll it found that six of 10 of those surveyed believe it is more important to maintain Social Security and Medicare benefits than to reduce the budget deficit.

___

Associated Press writers Ben Feller, Andrew Taylor, Alan Fram, Ricardo Alonso-Zaldivar, Erica Werner and Laurie Kellman contributed to this report.

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Dismal jobs picture complicates debt talks (Reuters)

WASHINGTON (Reuters) – Dismal unemployment figures on Friday complicated efforts to avert a looming U.S. debt default as a top Republican said negotiators were not close to a deal that would ensure continued borrowing.

Tamping down expectations that Democrats and Republicans could reach agreement over the weekend, House of Representatives Speaker John Boehner said the two sides must overcome serious disagreements on taxes and spending cuts.

"It's not like there's some imminent deal about to happen," Boehner told a news conference. "This is a Rubik's Cube that we haven't quite worked out yet."

Partisan finger-pointing erupted anew after a government report showed the unemployment rate rose to 9.2 percent in June, dousing hopes that the economy is picking up steam.

Boehner, the top Republican in Congress, and President Barack Obama, a Democrat seeking re-election in 2012, are trying to craft a sweeping budget deal that would ensure the national debt remains at a sustainable level by cutting $4 trillion from budget deficits over 10 years.

That would give lawmakers political cover to raise the government's debt ceiling of $14.3 trillion before August 2, when the country is due to run out of borrowing capacity. Failure to act soon, some warn, could push the United States back into recession and send shock waves through the global economy.

Democrats and Republicans remain at odds over what elements should be part of the deal. Democrats are pushing for roughly $1 trillion in new tax revenue, while Republicans want to restructure popular benefit programs.

Among the options, negotiators could limit a tax break for companies that provide health benefits to their workers, said Representative Sandy Levin, the top Democrat on the tax-writing Ways and Means Committee.

The uncertainty is hurting American companies and the overall economy, Obama said.

"The sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised and that we have a serious plan to deal with our debt and deficit, the sooner that we give our businesses the certainty that they will need in order to make additional investments to grow and to hire," he said at the White House.

The Republican-led House canceled a planned break during the week of July 18, which could make it easier for Congress to pass a deal by August.

MEETING ON SUNDAY

For now, financial markets are showing little concern.

In fact, investors beat a path to the U.S. Treasury's sale of $28 billion in four-week bills on Wednesday, elbowing each other for the chance to buy debt paying zero interest and maturing on August 4 -- two days after the deadline.

Obama, Boehner and other congressional leaders are due to meet on Sunday at 6 p.m. EDT (2200 GMT), with staffers working through the weekend to lay out options.

The session could see some hard bargaining but is not likely to produce a final deal, White House spokesman Jay Carney said.

The task probably was not helped by Friday's disappointing jobs report, which showed employers hired the fewest number of workers in nine months.

Obama is eager to bring the jobless rate down ahead of the November 2012 election, which will largely hinge on how Americans feel about the economy.

Republicans, who have passed bills that would roll back regulations and expand domestic oil and gas drilling, said Obama's policies have made businesses reluctant to hire.

"It just does not make sense for Americans to suffer under higher taxes in an economy like this," said Representative Eric Cantor, the No. 2 House Republican.

Democrats fear sharp spending cuts advocated by Republicans as part of any deficit reduction deal would further weaken the economy. Friday's report showed tepid private-sector job creation was undercut by state and local government layoffs as support from Obama's 2009 stimulus package has dried up.

Senate Democratic leaders have proposed ramping up highway construction, subsidizing green energy industries and extending a payroll tax cut due to expire at the end of this year. Those measures would worsen budget deficits and make it harder for negotiators to reach their $4 trillion goal.

(Additional reporting by David Morgan, Caren Bohan, Laura MacInnis and Matt Spetalnick in Washington and Ellen Freilich in New York; Editing by John O'Callaghan)

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Minnesota government shutdown begins after talks fail (Reuters)

MINNEAPOLIS (Reuters) – Minnesota's state government began a broad shut down on Friday going into the July 4 holiday after Democratic Governor Mark Dayton and Republican legislative leaders failed to reach a budget deal.

Parts of the government had already begun to shut down on Thursday ahead of the midnight budget deadline, including some websites and dozens of highway rest stops on one of the biggest travel days of the year.

The budget impasse means that some 23,000 of the roughly 36,000 Minnesota state employees will be furloughed and state parks and campgrounds closed ahead of what is usually their busiest stretch of the year for the July 4 holiday.

Dayton and Democratic legislative leaders Senator Tom Bakk and Representative Paul Thissen met for more than a week with Republican leaders including House Speaker Kurt Zellers and Senate Majority Leader Amy Koch. The leaders met several times on Thursday in the governor's office.

Neither Dayton nor the Republican leaders gave any indication when they would meet next to discuss the budget.

"I deeply regret that the last week of intense negotiations between the Republican legislative leaders and Senator Bakk, Representative Thissen and myself have failed to bridge the divide between us," Dayton said in a speech.

He said his last proposed two-year general fund budget was $35.7 billion, but the differences between his approach and the Republican leaders had not changed since January. The gap between the two sides stood at $1.4 billion, he said.

Republican leaders had asked Dayton to call a special session to approve a temporary extension of funding for 10 days while the budget negotiations were completed, saying that they believed they were close to a budget deal.

Dayton dismissed the offer as "a publicity stunt."

"They have known for two months, I have said consistently, that I would not agree to anything until I agree to everything," Dayton said.

All but the most critical state functions will be suspended while the spending impasse continues into the new fiscal two-year period that starts on Friday, which would make the 2011 shutdown much broader in scope than one in 2005.

Dayton and the Republican-led legislature have been far apart in their public positions over a two-year budget plan to close a $5 billion deficit. Only the agricultural budget was approved during the legislative session that ended in May.

Dayton's first budget proposal included an income tax increase on the wealthiest state residents and an expansion in overall spending. Republican leaders first sought some tax cutbacks in aiming to halt spending increases.

In the latest negotiations, Republicans had offered to raise $1 billion of revenue by shifting schools payments and issuing bonds for tobacco settlement money and Dayton offered to limit his proposed income tax increase to residents earning more than $1 million per year. None of the offers stuck.

"Tax revenues are still in my view the fairest way to resolve this, but we have offered an awful lot of different possibilities and they have too," Dayton said.

Republican leaders had said they believed the sides were close to agreement, but Thursday afternoon Koch told reporters that after a temporary funding extension they could "work for the next week or so and get everything wrapped up."

Prison staffing, state police patrols and staffing at nursing and veterans homes were among services found critical and allowed to continue by a Ramsey County judge. Staffing at numerous other departments will be cut to the bare bones.

Other critical functions included the executive and legislative branches of state government and the courts.

Payments to schools and local governments, and programs such as food stamps, Medicaid and temporary assistance to needy families also will continue during the shutdown.

However, numerous other programs were not considered critical and will be closed including the state lottery, the gambling control board and the racing commission.

About 100 road and bridge programs not considered critical to prevent an imminent bridge collapse or in response to a road emergency also were to be suspended after Thursday.

The Minnesota Zoo would also close to the public with spending permitted only to feed and care for the animals.

And among popular northern Minnesota spots, vacationers may stay at the privately run villa and lodge operations at Giants Ridge golf resort during the shutdown, but its lauded golf courses will be closed.

(Reporting by David Bailey; Editing by Greg McCune and Jerry Norton)

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Egypt's Muslim Brotherhood welcomes US talks (AP)

CAIRO – Egypt's powerful Islamist movement, the Muslim Brotherhood, is willing to hold talks with the United States, a spokesman said Friday, taking up an offer of dialogue seen as an implicit recognition by Washington that the group will likely hold significant political power in Egypt's post-Hosni Mubarak era.

U.S. Secretary of State Hillary Rodham Clinton said a day earlier that the Obama administration is reaching out to the Muslim Brotherhood in a "limited" effort to build ties and promote democratic principles.

The Brotherhood was banned for decades and was heavily suppressed by Mubarak's regime, which was closely allied to the United States. But since the longtime president was ousted on Feb. 11, the ban has been lifted, and the Brotherhood is campaigning hard for upcoming parliamentary elections.

Since it is the country's most organized political force, it is expected to make a strong showing and is very likely to be a member in the next government. Saying the U.S. seeks a real democracy in Egypt, President Barack Obama has acknowledged the Brotherhood should be allowed to operate freely in politics.

"We welcome dialogue with America to remove any misunderstandings and bridge gaps," Brotherhood spokesman Mohammed Ghozlan told The Associated Press on Friday in response to Clinton's comments.

He said it would be the first time the Brotherhood holds talks with the United States. However, there have been reports of indirect and informal contacts between Brotherhood and U.S. officials several years ago.

In her comments Thursday, Clinton said the outreach to the Brotherhood was part of a general desire in the administration to engage all Egyptian groups as long as they espouse nonviolence.

Ammar Ali Hassan, expert in Islamic groups, said that the Brotherhood will likely try to float "conditions" or "reservations" on any dialogue to avoid a perception that it is allowing the U.S. to meddle in Egypt's internal affairs. But in the end, the talks will give a boost the group, he said, by easing worries some in the Brotherhood and the public have of a backlash if the Brotherhood becomes the dominant player in Egypt.

"Now the Muslim Brotherhood will not have to worry of moving forward toward taking over power," Hassan said. "For decades, the United States has been eying this possibility and ready to open channels with whoever is the leading force in the country," he added.

The Brotherhood's bid for prominence comes at a time of growing discontent by pro-democracy protesters toward the military council that took power in Egypt after Mubarak's ouster. The Brotherhood has taken a pragmatic stance, praising the junta and avoiding participation in new protests.

Hundreds of democracy activists protested on Friday demanding speedy trials for former regime figures and policemen accused of killing protesters during the 18-day revolt earlier this year.

The demonstration came after two days of clashes between police and protesters pushing those demands. The violence earlier this week injured more than 1,000 people and more than 30 were arrested.

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Short session: NFLPA, owners break talks for week (AP)

MINNEAPOLIS – The labor negotiating teams led by NFL Commissioner Roger Goodell and players' association chief DeMaurice Smith met for a couple of hours Friday and will return to the table after the July 4 weekend.

The two sides held a 15-hour session Thursday that spilled over into the early hours Friday. After taking a six-hour break to catch some sleep, the sides met again but by late morning left the office building where talks were being held.

Smith and NFL lead negotiator Jeff Pash said the players and league would be back at it next week, declining further comment. Several people familiar with the situation said the negotiations would resume Tuesday in New York City. The people all spoke on condition of anonymity to The Associated Press because details of the talks are not being made public.

U.S. Magistrate Judge Arthur Boylan oversaw this week's discussions, which the past couple of days have included players representatives and owners.

Among the players were Jeff Saturday of the Indianapolis Colts and Brian Waters of the Kansas City Chiefs. The owners' group included John Mara of the New York Giants, Clark Hunt of the Kansas City Chiefs, Jerry Jones of the Dallas Cowboys and Robert Kraft of the New England Patriots.

Friday marked the fourth straight day of negotiations. The lockout began March 12, with the central issue being how to split revenues for the $9 billion business.

For weeks, owner and player representatives have been hopscotching around the country, holding unannounced meetings in spots ranging from Chicago to the Maryland shore.

This week began with optimism as Smith and Goodell and their staffs met privately Tuesday in Minnesota, then left the table to address incoming rookies at an orientation symposium in Florida on Wednesday morning, projecting an air of cooperation and respect.

But Friday's session ended without a deal, and time is gradually becoming a factor in the process.

Training camps start in about three weeks, with the preseason-opening Hall of Fame game scheduled Aug. 7 between the Bears and Cardinals.

There also is the wild card of a pending federal appeals court ruling in the players' antitrust suit against the league, which was filed in Minneapolis and prompted Boylan's involvement as a mediator. One judge has warned that neither side will like the 8th Circuit's decision on the legality of the lockout, but a faction on the players' side believes it is worth waiting on the court's ruling.

The latest talks came as the NBA began its own lockout after it failed to reach a new collective bargaining agreement with its players. It is believed to be only the second time that two of the main leagues have been shut down simultaneously by labor problems. The NHL and MLB were idle from October 1994 through mid-January 1995.

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Pro Football Writer Barry Wilner in New York contributed to this report.

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Obama calls for stimulus in debt talks (Reuters)

WASHINGTON (Reuters) – President Barack Obama called on Wednesday for new job-creation measures that are likely to further complicate talks with Republicans to bring the country's debt under control.

Obama said Congress should approve loans to encourage construction spending and consider a payroll tax break and other measures to bring down the 9.1 percent unemployment rate.

"It makes perfect sense for us to take a look at, can we extend the payroll tax, for example, an additional year, and other tax breaks for business investment that could make a big difference in terms of creating more jobs right now," he told a White House news conference.

Those measures likely would add hundreds of billions of dollars to budget deficits at a time when the White House and lawmakers are trying to narrow them by more than $1 trillion. Congressional Republicans oppose those measures and say they have no place in the talks.

"In the middle of a debt crisis, they want to borrow and spend more money as a solution to the problem. This isn't a negotiation, this is a parody," Senate Republican Leader Mitch McConnell said earlier on the Senate floor.

With budget talks at a standstill, Treasury Secretary Timothy Geithner said he would not be able to stave off default if Congress does not reach a deal to raise the $14.3 trillion debt ceiling by August 2.

The International Monetary Fund also said failure to reach a deal soon could deliver a "severe shock" to a still-fragile recovery and global markets.

Obama and congressional Republicans are deadlocked over whether tax increases should be part of a spending-cut deal that would give lawmakers political cover to extend the government's borrowing authority.

Financial markets have so far shown little concern, but that could change if a deal doesn't emerge in the coming weeks.

Geithner said investors would still shun U.S. debt after the August deadline even if Treasury made debt payments its top priority -- an approach backed by many Republicans.

"Ultimately, the notion of 'prioritizing' payments is futile because the debt limit must be increased regardless of which spending path is adopted," he wrote in a letter to congressional Republicans.

"There is no credible budget plan under which a debt limit increase can be avoided."

Obama is due to meet with top Senate Democrats later on Wednesday to discuss the deficit reduction negotiations, which stalled last week. He has already met with top Republicans but no follow-up meetings have been set.

(Writing by Andy Sullivan; additional reporting by David Morgan, Glenn Somerville, Patricia Zengerle and Alister Bull)

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'Get it done,' Obama challenges GOP on debt talks (AP)

WASHINGTON – In a blunt challenge to Republicans in Congress, President Barack Obama insisted Wednesday that elimination of selected tax breaks for oil companies and the super-wealthy must be included in any deficit reduction plan.

"You stay here. Let's get it done," he all-but-lectured lawmakers, holding open the possibility of keeping Congress in Washington unless there is significant progress by week's end on a deal to cut deficits, raise the $14.3 trillion debt limit and avert a threatened financial crisis.

He said a plan must be in place by Aug. 2, a date he called "a hard deadline."

At his first White House news conference in three months, lasting a little over an hour, Obama also called on Congress to renew a payroll tax cut that took effect on Jan 1, one of several steps he said lawmakers can take quickly to help reduce 9.1 percent unemployment.

Although he declined to announce support for legalizing gay marriage, he defended his record on rights for homosexual Americans, saying he had done more to advance their cause than any of his 43 presidential predecessors.

On the deficit and economy, Obama said both parties must be prepared to "take on their sacred cows" as part of the negotiations, with Democrats accepting cuts in government programs.

At the same time, he said any agreement must include increased government revenue. Attempting to blunt Republican criticism, he said he also wants to extend existing middle class tax cuts.

"The tax cuts I'm proposing we get rid of are tax breaks for millionaires and billionaires, tax breaks for oil companies and hedge fund companies and jet owners," he said.

Obama's last previous full-fledged news conference was in March. In the intervening months, the economic recovery has slowed, the president has announced a plan to begin withdrawing U.S. combat troops from Afghanistan and the administration has joined an international military coalition working to prevent the rout of rebels hoping to topple Libyan leader Moammar Gadhafi.

The president stepped to the podium not long after the International Monetary Fund publicly urged lawmakers to raise the U.S. debt limit, now $14.3 trillion, and warned that failure to do so could produce a spike in interest rates and "severe shock to the economy and world financial markets."

The IMF recommended a long-term strategy for reducing red ink, warning that cutting deficits too quickly could slow the weak recovery of the U.S. economy.

The budget deficit is projected to reach a record $1.4 trillion for the current fiscal year, which ends Sept. 30.

Republicans in Congress have been insistent in recent days that any deficit reduction be limited to spending cuts, including reductions in benefit programs such as Medicare and Medicaid, and exclude additional revenues.

In remarks made during the day, Senate Republican leader Mitch McConnell of Kentucky said Obama "said as recently as six months ago that keeping taxes where they are enables businesses to hire more workers. In other words, that raising taxes leads to fewer jobs. So he can call for tax hikes. But he can't call for tax hikes and job creation. It's one or the other. `'

Obama said talks led by Vice President Joe Biden had "identified more than $1 trillion worth of spending cuts already. But everyone also know that we need to do more to close the deficit," he added, citing a goal of $4 trillion.

In his opening remarks, the president called on lawmakers to renew a 2 percentage point cut in Social Security taxes in effect since Jan 1, pass trade agreements with Panama, South Korea and Colombia and overhaul of the nation's patent laws.

On Libya, the president defended American participation in the NATO military action, saying the U.S. had carried out a "narrow mission in an exemplary fashion" against a tyrant who was threating to "massacre his people."

"We have not seen a single U.S. casualty," he said. "There's no risk of additional escalation. This operation is limited in time and in scope."

Defending his record on gays, he pointed to eliminating the ban on openly gay men and women serving in the military, a policy known as "don't ask, don't tell," as well as ordering the Justice Department not to defend a law that defines marriage as between a man and woman.

Obama also bristled at calls for him to show greater leadership in the debt talks.

"They need to do their job. Now's the time to go ahead and make the tough choices. That's why they're called leaders," he said, in a clear reference to Republicans who say he has failed to exercise leadership.

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Obama meets Senate leaders, keeps debt talks alive (Reuters)

WASHINGTON (Reuters) – President Barack Obama sought on Monday to narrow the gap between his Democrats and Republicans over raising the debt ceiling, but neither side sounded inclined to compromise ahead of the talks.

Obama met Senate Democratic leader Harry Reid for a little over 30 minutes at the White House and is scheduled to sit down with Senate Republican leader Mitch McConnell at 5 p.m. (2100 GMT).

Reid left the White House without talking to reporters and it was not immediately clear if the ground covered in the meeting would be made public.

Time is running out ahead of an August 2 deadline to raise the borrowing limit. Administration officials said the most important thing was to keep both sides talking, which was why negotiations had escalated to the president.

Talks led by Vice President Joe Biden broke down last week over Democrats' demands to include raising tax revenues alongside spending cuts to lift the $14.3 trillion borrowing limit before the government runs out of cash on August 2.

Failure to act risks the United States defaulting on its financial obligations, which could push the country back into recession. Obama is also trying to ease public concern over his handling of the deficit, which is likely to be a key topic as he seeks re-election next year.

The federal deficit stands at $1.4 trillion, among the highest levels relative to the economy since World War Two.

McConnell has stuck firmly to his party's line that revenue-raising measures were off the table.

"America does not face a debt crisis because we tax too little, but because Washington spends too much. And tax hikes can't pass the Congress. Not only is there bipartisan opposition, the consequences of massive new tax hikes would be fewer jobs," he wrote in an opinion piece for CNN on Monday.

Obama met with House of Representatives Speaker John Boehner, a Republican, and House Minority Leader Nancy Pelosi, a Democrat, last week. The House is not in session this week and many members, including Boehner, are back in their districts.

AVOID STOP-GAP DEAL

The debt ceiling needs to be raised by around $2.4 trillion to ensure that the government has enough money to keep functioning through the November 2012 election.

McConnell has floated the idea of a short-term funding agreement to win a couple of extra months of funding, but the administration said this should not be necessary.

"I don't see any reason to doubt that we'll be able to do a long-term extension of the debt limit accompanied by very serious deficit reduction," a senior administration official said. "We should have a long-term extension that gives people security and confidence."

Republicans say they want spending cuts to equal any increase in the limit, but the administration is pushing for a package that also includes revenues. Obama favors $3 dollars in spending cuts for every extra dollar in revenue.

Democrats are aiming at tax subsidies for oil and gas companies, so-called "carried interest" tax breaks for hedge fund managers, and loopholes that favor corporate jets.

Obama has also backed limiting tax deductions for wealthier Americans which the White House says targets millionaires and billionaires.

But Republicans contend it would also hit hundreds of thousands of small business owners and raise taxes of many American families by limiting deductions for things like mortgage interest payments.

The administration wants to frame the debate as Republicans protecting tax breaks for the rich at the expense of older Americans, and says cuts in spending must also include the Defense Department budget that Republicans traditionally protect.

"Any package of any significance that passes is going to have to have significant spending reductions, including reductions in Pentagon spending. You are going to have some of these tax loopholes for the wealthy and special interests closed," said a senior administration official.

(Editing by Vicki Allen)

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