* Obama says he’s “modestly optimistic”
* U.S. stocks indexes drop 1 percent
By Roberta Rampton and Richard Cowan
WASHINGTON, Dec 28 (Reuters) - President Barack Obama and congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the “fiscal cliff,” setting off intense bargaining over Americans’ tax rates as a New Year deadline looms.
The focus now turns to the Senate, where Harry Reid, the Democratic majority leader, and Mitch McConnell, who heads the Republican minority, will try to come up with a deal that can then be approved in the Republican-controlled House of Representatives before the end of the year.
Obama said he was “modestly optimistic” that an agreement could be found that would prevent taxes going up for almost all working Americans.
If things cannot be worked out in the Senate, Obama said he wanted both chambers in Congress to vote on a plan of his that would increase taxes only for households earning more than $250,000 a year.
The plan would also extend unemployment insurance for about 2 million Americans and set up a framework for a larger deficit reduction deal next year.
“The hour for immediate action is here. It is now. We’re now at the point where in just four days, every American’s tax rates are scheduled to go up by law. Every American’s paycheck will get considerably smaller. And that would be the wrong thing to do,” Obama told reporters.
He was speaking after an hour-long meeting in the White House with the two Senate leaders plus their counterparts in the House, Republican Speaker John Boehner and Democratic Minority Leader Nancy Pelosi.
A total of $600 billion in tax hikes and cuts to government spending will start kicking in on Tuesday if politicians cannot reach a deal, which could push the U.S. economy into a recession.
To prevent that, the two Senate leaders will plunge into talks on Saturday that will focus mainly on the threshold for raising income taxes on households with upper-level earnings.
They will also discuss whether the estate tax should be kept at current low levels or allowed to rise, a Democratic aide said.
The chances of success were unclear. Earlier talks between Obama and Boehner collapsed last week when several dozen anti-tax Republicans defied their leader and rejected a plan to raise rates for those earning $1 million and above.
The Democratic aide said Boehner stuck mainly to “talking points” in Friday’s White House meeting, with the message that the House had acted on the budget and it was now time for the Senate to move. A core of fiscal conservatives in Boehner’s caucus opposes any tax hikes at all, and House Republicans also want to see Obama commit to major spending cuts.
Pessimism about the fiscal cliff helped push U.S. stocks down on Friday for a fifth straight day. The Dow Jones industrial average dropped 158.20 points, or 1.21 percent.