Democrats sought to forge a last-ditch compromise with Republicans on Friday by offering a concession to avoid a crippling US default, but a bitter divide remained before Tuesday's deadline to raise the country's debt ceiling.

The Republican-controlled House of Representatives approved a deficit-cutting plan and the Democratic-led Senate quickly rejected it, moves that underscored the ideological differences but also opened the way to start negotiating a deal.

The back-to-back votes broke weeks of political inertia in efforts to lift the $14.3 trillion US debt limit by Tuesday after which the world's largest economy will be unable to pay all of its bills, the government says.

But hopes for a quick resolution faded as the Senate adjourned for the evening after a round of parliamentary maneuvering and finger-pointing, setting the stage for a tense weekend in Washington.

Senate Democratic Leader Harry Reid ceded some ground late on Friday when he revised his own deficit-reduction proposal to incorporate parts of a "backup plan" first proposed by the Senate's top Republican, Mitch McConnell.

The new version would essentially give President Barack Obama the authority -- and the blame -- to raise the debt ceiling in three stages to cover US borrowing needs through the 2012 elections when he is running for a second term.

Obama and his Democrats had hoped to avoid multiple votes before the election.

Despite the pressing deadline, progress toward an agreement did not appear imminent.

"They are refusing to negotiate with us and all they do is talk," Reid told reporters after the Senate vote, which like the House tally hewed to party lines.

Delays and procedural hurdles will still make it all but impossible for Congress to strike a deal and send it to Obama's desk before Monday night at the earliest, injecting further uncertainty into already rattled global financial markets.
Even if a late deal can be struck, the United States risks losing its top-notch AAA credit rating, a once-unthinkable event for world financial markets that would push up the US cost of borrowing while the economy is still struggling.

World leaders have been stunned by the dysfunction in Washington. World Bank President Robert Zoellick on Friday said the United States was playing with fire.

America's largest foreign creditor, China, has repeatedly urged Washington to protect its dollar investments and its state-run news agency on Friday said the United States had been "kidnapped" by "dangerously irresponsible" politics.

Wall street ended its worst week in a year on Friday. The US dollar plunged to a record low against the Swiss franc, which is viewed by investors as a safe haven currency.

In short-term lending markets, investors dumped holdings over fears about the talks, driving rates on Treasury debt that matures in August to six-month highs.

The US Treasury warned Wall Street firms it might delay or cancel a major round of bond sales if Congress does not raise the debt limit in time.

Both sides in Congress have been at impasse for weeks with lawmakers locked in a blame game that has raised the risk of a potentially devastating default, which could plunge America back into recession and trigger economic turmoil globally.

Developments gathered pace on Friday when Republicans pushed a deficit-cutting plan through the House by a vote of 218-to-210 after the party's leaders reworked the bill to appease anti-tax conservatives in their ranks.

The legislation, denounced earlier by Obama who had admonished lawmakers to stop wasting time and find a way "out of this mess," was always doomed to defeat in the Senate where all of Obama's Democrats had vowed to vote against it.

The Senate defeated the measure, 59-to-41.

"We are moving a bit closer," said Axel Merk, president of Merk Investments in Palo Alto, California. "We'll get an agreement, ultimately, but the drama is going to continue to play out."

Political maneuvering

Senate Democrats had hoped to work out a compromise with Republicans on Friday but said McConnell refused to negotiate.

Immediately after defeating the House bill pushed by Republican Speaker John Boehner, Reid sought to sway some Senate Republicans by offering a revised version of his plan that included elements from one McConnell proposed weeks ago.

Through a complex legislative procedure, Obama would be able to increase the debt ceiling by $2.4 trillion in three stages but Republicans would have political cover by not having to explicitly approve each case. The White House has not ruled out accepting such a provision.

Republican aides said McConnell wants to negotiate directly with the White House to ensure that Democrats will be on board with any final deal.

Reid will find out how many Republicans back his plan in a procedural vote scheduled for 1 a.m. EDT (0500 GMT) on Sunday.

If all 53 Democrats back the plan they will need at least seven Republicans to clear the 60-vote threshold. – Reuters