Prospect of U.S. government shutdown eases

Illuminated balloons, held by people walking, color the sky in this long exposure image in front of the U.S. Capitol in Washington October 16, 2010.

WASHINGTON (Reuters) - The risk of a U.S. government shutdown eased on Tuesday after a top Republican backed a stopgap measure to keep programs funded beyond March 4.

The White House also expressed confidence that the two parties can agree to keep the government going and avoid a political standoff that could unsettle financial markets and risk mass government layoffs.

House of Representatives Speaker John Boehner said his chamber "will pass a short-term bill to keep the government running -- one that also cuts spending," if the Democratic-led Senate refused to vote on a tough spending-cut bill that passed the House on Saturday.

President Barack Obama's Democrats are fighting a pitched battle over spending cuts with Republicans, who were energized by big wins in November elections after campaigning for smaller government to curb a massive U.S. budget deficit.

The federal government will run out of money for non-essential operations if the two parties fail to agree on funding by the end of next week. That could lead to a shutdown -- something Republicans are wary of repeating because voters blamed them for disruption to benefits and services in the three-week shutdown of 1995-96.

Senate Democratic leaders on Tuesday called on House Republicans to start immediate negotiations.

"We cannot afford a shutdown at this critical point in our economic recovery," Senate Democratic Leader Harry Reid told reporters in a hastily called telephone conference call.

"There is no question: We need to cut government spending," Reid said. "The debate isn't whether we cut, it is how we cut."

According to one Senate aide who asked not to be identified, there already have been conversations between Reid and Boehner and between their top staffers. But Reid insists there hasn't been bipartisan negotiations.

The White House said that neither party wanted to see a government shutdown, but stressed it had a plan in place if this outcome could not be avoided.

"All four leaders of Congress, leaders of the House, leaders of the Senate, have expressed their confidence that we can work this out before March 4, and we believe we can," said White House press spokesman Jay Carney.

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Boehner did not specify the level of cuts that would have to be included in a stopgap spending bill in order for House Republicans to embrace it.

The Republican-controlled House has backed a bill lowering spending by $61 billion through September, putting it on a collision course with the Senate, where Democrats warn such steep reductions could sap a fragile U.S. economic recovery.

Lawmakers must agree on legislation to fund federal programs until the end of the fiscal year on September 30. A current stop-gap financing bill expires March 4.

This risks a shutdown in which thousands of federal workers could be laid off, hitting services for millions of Americans and yielding uncertain dividends for whichever political party is blamed for the resulting inconvenience.

But in a demand that could complicate negotiations, Senate Democrats are insisting the stopgap funding bill keep spending at current levels, which conservative Republicans are against.

The White House Office of Management and Budget said it was ready for a shutdown but saw the chances of one as slim.

"OMB is prepared for any contingency as a matter of course ... Since 1980, all agencies have had to have a plan in case of a government shutdown, and they routinely update them," said OMB spokesman Kenneth Baer.

During the last government shutdown, from Dec 16, 1995 to Jan 6, 1996, all U.S. national parks were closed, distribution of benefits was disrupted and hundreds of thousands of federal workers were laid off temporarily.

Obama has proposed a budget for the next fiscal year, starting on October 1, that would freeze discretionary spending for 5 years to curb the deficit by $400 billion over 10 years, although the deficit would still hit $1.645 trillion this fiscal year before dropping to $1.101 trillion in fiscal 2012.

(Additional reporting by Caren Bohan, Thomas Ferraro and Donna Smith)