* Government agencies prepare for shutdown
* Democrats reject latest Republican plan
* Observers say shutdown still unlikely
By Andy Sullivan
WASHINGTON, April 5 (Reuters) - Washington braced for a shutdown as Republican and Democratic lawmakers headed to the White House on Tuesday in an attempt to reach a budget deal that would keep the government running beyond Friday.
With only four days to cement a deal, the two sides have yet to resolve major differences in a long-overdue budget plan that would slice a record $33 billion from current spending levels.
The White House directed government agencies to prepare for a shutdown if the U.S. Congress does not pass a budget plan before funding runs out at midnight on Friday. [ID:nN05100992]
Republicans have floated a new plan that would push the deadline back by a week and impose another $12 billion in cuts, but Democrats have called it unacceptable.
The shutdown talk could merely be posturing before the 10:15 a.m. (1515 GMT) meeting between President Barack Obama and congressional leaders, or it could be a sign that a deal may be out of reach for the time being.
“I don’t know if we will need divine inspiration or divine interjection into this matter, but whatever it might take, I hope people of good will can come to an agreement,” Democratic Senator Dick Durbin said.
Observers said a shutdown still appeared less than likely at this point, as neither side would benefit if their inaction closed everything from passport offices to bankruptcy courts.
“Our odds remain above 50 percent that the government will not shut down on Saturday, though it is close to a jump ball,” wrote MF Global analyst Chris Krueger in a research note.
Congress is struggling to complete an overdue budget for the fiscal year that ends Sept. 30, even as lawmakers wade into wider budget battles. Republicans are eager to fulfill a campaign promise to scale back the size of government, while Democrats say the cuts they envision could push the economy back into recession.
A spending cut of $33 billion would lead to sharp cutbacks at government agencies, but would do little to plug a U.S. deficit that is projected to hit $1.4 trillion this year.
Amid the fight, Republicans laid the groundwork for wider budget battles.
House Republicans on Tuesday will propose a fundamental overhaul of government-run health programs, dramatic tax cuts and sharp spending caps in a budget plan for the coming fiscal year, which starts Oct. 1.
Though the plan will not get far in the Democratic-controlled Senate, it will push the budget debate well into the 2012 election season, when both Obama and his Republican adversaries will face voters fretting about a sluggish economy and record government deficits.
Democrats won the battle of public opinion the last time budget battles shut down the government in 1995 and 1996, but polls show voters evenly split about which party would be to blame this time.
The two sides remain at loggerheads over where the cuts would fall. Democrats want to protect scientific research and education and carve $2 billion out of defense and security spending. [ID:nN04285882]
Republicans, meanwhile, want to ensure that most of the cuts come from the discretionary spending that is passed each year by Congress, which would establish a lower baseline for future budgets and maximize the impact of the cuts.
They also want to use the budget to choke off funding for dozens of Obama priorities, including his healthcare reform and environmental protection. (Additional reporting by Jeff Mason; Editing by Doina Chiacu)