S&P says U.S. to avoid "fiscal cliff," risks remain

NEW YORK (Reuters) - Standard & Poor's said on Friday it expects U.S. lawmakers to set aside their differences to prevent a combination of tax hikes and spending cuts from hurting the economy in early 2013.

The rating agency affirmed the AA-plus rating of the world's biggest economy but cautioned that its outlook remains negative.

The affirmation of the rating restarts the six- to 24-month period in which the agency could again cut the U.S. rating.

"One thing we do expect Republicans and Democrats to agree on -- given an unemployment rate of about 8 percent and continued risks to the U.S. economic recovery -- is avoiding sudden fiscal adjustment," the agency said in a statement.

The United States lost its top-tier AAA credit rating from Standard & Poor's last August in the wake of a bruising fight in Congress over lifting the government's debt limit.

"We expect that a sudden fiscal adjustment could occur if all current tax and spending provisions, set to either expire or take effect near the end of 2012, go forward in accordance with current law," S&P said on Friday.

Bush-era tax cuts are to expire on December 31, deep, automatic spending cuts roll out on January 1, 2013, and U.S. borrowing authority must be raised early in the year to avoid the risk of default.

The slate of measures to be faced by a lame duck session of Congress has been dubbed the "fiscal cliff."

A stalemate over how to deal with that combination would likely push the U.S. economy into recession in the first half of next year, the Congressional Budget Office warned last month.

While investors have recently focused on downgrades among European sovereigns - including a significant three-notch downgrade of Spain by Fitch Ratings on Thursday - the fragile U.S. economy has loomed in the background.

With recent disappointing jobs data and concerns about policy paralysis as the presidential election swings into full gear, the health of the U.S. economy remains uncertain.

This week Janet Yellen, the Federal Reserve's second-highest official, laid out the case for the U.S. central bank to provide more support to a fragile economy as financial turmoil in Europe mounts.

S&P said the U.S. economy still faces "significant" risks, adding that "we believe the risk of returning to recession in the U.S. is about 20 percent."

In affirming the rating, S&P cited the resilience of the economy, its monetary credibility and the dollar's status as the world's key reserve currency.

But the country faces "primarily political and fiscal" credit risks, S&P said.

The United States is rated AAA by Fitch Ratings and Aaa by Moody's Investors Service. Both agencies have negative outlooks on the ratings, which means they could act within 12 to 18 months.

Earlier this week Fitch said it would cut its sovereign credit rating for the United States next year if Washington cannot come to grips with its deficits and create a "credible" fiscal consolidation plan.

(Additional reporting by Pamela Niimi; writing by Luciana Lopez; Editing by Gary Crosse, Dan Grebler and David Gregorio)