* New stance reflects urgency to avoid default
* Lawmakers seek to combine McConnell-Gang of Six plans
* Obama meets separately with Republicans, Democrats
* Fed making contingency plans in case of default (Updates with Democratic officials, quotes)
By Jeff Mason and Andy Sullivan
WASHINGTON, July 20 (Reuters) - The White House signaled on Wednesday it could support a short-term increase in the U.S. borrowing limit for “a few days” if lawmakers agreed to a broad deficit reduction deal but needed more time to pass it.
The move, a shift from President Barack Obama’s previous position, reflects the growing political reality that time is short for Congress to pass a massive deficit-cutting deal before the United States runs out of money on Aug. 2.
A new proposal for long-term deficit reduction from a bipartisan group of senators known as the Gang of Six has revived hope that a broad agreement on spending cuts can be reached to avoid a looming default and alleviate pressure on America’s triple-A credit rating.
Republicans do not want to support increasing the debt limit without deep spending cuts. Democrats want tax increases for the wealthiest Americans to be part of a deficit cutting package, an option most Republicans rule out.
Obama had vehemently opposed a short-term extension of the $14.3 trillion debt limit as a solution to the dilemma, and the White House reiterated that stance on Wednesday -- but with a caveat.
Obama’s spokesman Jay Carney said in a written statement that the president would consider supporting a short-term fix if a deal had been reached “and we needed a very short-term extension (like a few days) to allow a bit of extra time for a bill to work its way through the legislative process.”
Full coverage of U.S. budget and debt [ID:nUSBUDGET]
Possible outcomes for U.S. debt talks [ID:nN1E76I10Y]
Anything possible if U.S. downgraded [ID:nN1E76I1M8]
White House officials had previously said July 22 was the last day a deal could be reached in time to get legislation through Congress, but meeting that deadline looks increasingly unlikely. Negotiators may meet through the end of the month.
The United States will run out of money to pay its bills if Congress does not increase the debt limit by Aug. 2. Failure to act could plunge the United States back into recession and send shockwaves through global financial markets.
The Federal Reserve has been actively preparing for the possibility of default, ironing out what to do if the world’s biggest economy runs out of cash in two weeks, Philadelphia Federal Reserve Bank President Charles Plosser told Reuters. [ID:nN9E7HG01X]
Plosser said his “gut feeling” was that Obama and Congress would come to an agreement and avert a default.
Obama and congressional leaders have tried to reassure markets that the debt ceiling will be raised and a default avoided.
Obama met with Democratic congressional leaders at the White House on Wednesday afternoon and then held a separate meeting with John Boehner and Eric Cantor, the No. 1 and No. 2 Republicans in the House of Representatives, for roughly 1-1/2 hours later in the day.
Aides declined to give details about the meetings, but two Democratic officials said Obama had reiterated his opposition to a short-term deal in both settings.
The leaders were expected to have discussed an ambitious deficit reduction plan proposed on Tuesday by the Gang of Six. Obama has latched onto that plan as a way to help end the deadlock, which has threatened the United States’ top-notch credit rating. [ID:nN1E76I1TF]
The $3.75 trillion Gang of Six plan calls for an immediate $500 billion in deficit savings and gives Congress six months to come up with more far-reaching reforms.
One of its authors, Democratic Senator Kent Conrad, said the initial portion could be used to raise the debt ceiling. That downpayment could presumably be raised to win the support of House Republicans who have given the plan mixed reviews.
Lawmakers have been scrambling to find a solution, and there is no single plan.
One leading option had been put forward by Senate Republican leader Mitch McConnell and billed as a backup plan, which passes responsibility, authority and potentially blame for raising the debt ceiling to Obama.
McConnell’s plan would allow Obama to raise U.S. borrowing authority in three separate chunks over the next year. He has been negotiating with Senate Democratic leader Harry Reid to make it palatable to Democrats.
The stalemate on debt talks has shaken global markets, and credit rating agencies said even if lawmakers raise the debt limit in time, the top-notch triple-A credit rating will still be under pressure without a broad deficit-reduction plan.
Brett Rose, head of U.S. rates strategy for Citigroup, said markets and rating agencies understand that ironing out all the legislative details could take time.
“They probably would have to do a short-term thing for a couple of weeks or a month while they get that passed, and that deal would satisfy the ratings agencies,” Rose said. “I don’t think this is a tactic that the ratings agencies would disapprove of.”
Investors welcomed the Group of Six 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.
An analyst from Fitch said it was encouraging that progress appeared to be being made on a substantial deficit-reduction deal and said the credibility of the bipartisan plan was as important as the overall savings amount. (Additional reporting by Richard Cowan, Thomas Ferraro, Matt Spetalnick and Alister Bull in Washington, Kristina Cooke and Tim Ahmann in Philadelphia, and Emily Flitter in New York; Writing by Deborah Charles and Jeff Mason; Editing by Eric Beech)