"Gang of Six" budget talks founder in Senate

House Budget Committee Chairman Rep. Paul Ryan arrives to listen to President Obama deliver a speech on fiscal and budgetary deficit policy at the George Washington University in Washington, April 13, 2011.

WASHINGTON (Reuters) - Deficit-reduction talks among a high-profile group of senators foundered on Tuesday in a bleak sign for other lawmakers trying to hammer out a deal to tackle the country's budget woes.

Republican Tom Coburn, one of the Senate's leading fiscal conservatives, told reporters he was dropping out of the bipartisan "Gang of Six" after months of meetings.

"We can't bridge the gap between what actually needs to happen and what people will allow to happen," Coburn said.

A source familiar with the talks said Coburn had pushed for deep and immediate cuts to Medicare, the healthcare program for the elderly, which were rejected by other members of the group. Coburn's proposal was described as more dramatic than a plan that passed the Republican-controlled House of Representatives last month.

Other members said they would continue their talks, and aides said a meeting was scheduled for Wednesday, but prospects for a deal appeared to dim.

"I would hope that eventually we'll still as a Group of Six be able to come together on some long-term resolution of the issue, but (it) looks like that's not going to happen short-term," said Republican Senator Saxby Chambliss.

Coburn's defection underscores the stark partisan divide on taxes and spending in Washington as lawmakers try to hammer out a budget deal that would give them political cover to back an increase in the $14.3 trillion debt ceiling.

"It's been no secret the gap has been what are you going to do with entitlements, what are you going to do with revenues," Chambliss said.

The United States hit the debt limit on Monday, and the Treasury Department has said it can stave off a default until early August, at which point the country could face a default that could push the economy back into recession and roil markets across the globe.

Markets have shrugged off the news so far, but Treasury Secretary Timothy Geithner said there was no way to predict when they would demand higher interest rates for its debt.

"When confidence turns, it can turn with brutal force and with a momentum that is very difficult and costly to arrest," he said in remarks prepared for delivery in New York.

Republicans and many Democrats have said they will not back a further increase without limits that ensure the country's debt remains at a manageable level relative to the economy.

Vice President Joe Biden has convened a separate group of six lawmakers to see if a deal is possible.

HOPES TURN TO BIDEN GROUP

Biden's group, composed of lawmakers not known for their budget-writing expertise, was met with widespread skepticism when it held its first meeting earlier this month.

After three meetings, it has emerged as perhaps the best hope for averting a default.

Members of the "Biden Six" have agreed so far on roughly $150 billion in spending cuts, a participant in the talks said.

"We're talking in the area of about $150 billion right now. We all recognize we have to do a lot more than that," Republican Senator Jon Kyl told reporters.

Kyl said the cuts, which he declined to identify, were relatively easy to find because they had been previously suggested in both Republican and Democratic plans. Those areas include farm subsidies, the sale of the electromagnetic spectrum, and retirement plans for federal workers.

That will not be enough for Republicans, who are looking for spending cuts in the trillions of dollars.

Another participant in the Biden group, House Republican Leader Eric Cantor, said in Chicago he was "cynical" about whether Democrats would agree to deep spending cuts, although there was an "air of willingness" among members of the group to find a solution.

A final deal could include specific cuts paired with a longer-term framework that sets deficit-reduction targets, Kyl and Geithner said separately.

The Biden group has yet to tackle the big-ticket items -- taxes and healthcare -- that stumped the Gang of Six.

With the 2012 election cycle already under way, lawmakers may decide it would be better to campaign on their differences than to try to resolve them.

Democrats have exploited public unease with Republicans' plans for Medicare in their drive to pick up a vacant seat in the House of Representatives in a special election in New York next week.

(Additional reporting by Andrew Stern in Chicago and Glenn Somerville in Washington; Editing by Caren Bohan and Peter Cooney)