U.S. shutdown seen dragging on as debt ceiling fight nears


* Fears grow shutdown will last until mid-October

* Budget row gets closer to merging with debt limit date

* Republican-led House prepares more mini funding bills

* Treasury warns of potential "catastrophic" downturn

By Mark Felsenthal and Richard Cowan

Oct 3 (Reuters) - The shutdown of the U.S. governmentappeared likely to drag on for another week and possibly longeras lawmakers consumed day three of the shutdown with a stallinggame and there was no end in sight until the next crisis hitsWashington around Oct. 17.

That is the date Congress must raise the nation's borrowingauthority or risk default, and members of Congress now expect itto be the flashpoint for a larger clash over the U.S. budget aswell as President Barack Obama's healthcare law.

The situation gives "every appearance of getting dangerouslyclose to the conversation on the debt ceiling," Nancy Pelosi,the Democratic Minority Leader of the House of Representatives.

In fact, she said, "we're in the conversation on the debtceiling."

At the same time, hopes that the debt ceiling fight could beresolved without a catastrophe were raised by reports in The NewYork Times and Washington Post that House Speaker John Boehnertold other lawmakers he would work to avoid default, even if itmeant relying on the votes of Democrats, as he did in August of2011.

A spokesman for Boehner would neither confirm nor deny thereports, restating previous public statements by the Speakerthat "the United States will not default on its debt."

Senator Charles Schumer, the second-ranking Senate Democrat,reacting to the reports, said, "This could be the beginnings ofa significant breakthrough."

The New York senator added, "Even coming close to the edgeof default is very dangerous," as he urged quick passage oflegislation to raise the $16.7 trillion cap on borrowing.

There was little action along with the talk on Thursday. TheRepublican-controlled House continued what has become a longprocess of voting to fund publicly popular federal agencies -like the Veterans Administration, the National Park Service andthe National Institutes of Health - that are now partiallyclosed.

Republicans know that neither the Democratic-controlledSenate or President Barack Obama will go along with such anapproach, but it allows them to accuse Democrats of workingagainst the interests of veterans, National Parks and cancerpatients.

House Republicans on Thursday began queuing up 11 more billsto fund targeted programs. They are to fund nutrition programsfor low-income women and their children, a program to securenuclear weapons and non-proliferation, food and drug safety,intelligence-gathering, border patrols, American Indian andAlaska Native health and education programs, weather monitoring,Head Start school programs for the poor and other aid forschools that rely heavily on federal assistance.

Disaster assistance also is slated for temporary renewalunder the House measures, as well as a bill to provideretroactive pay to federal workers during the governmentshutdown.

"We're trying to see if we can get the Senate and thepresident to start talking to us, on anything. They're just nottalking to us," said Republican Representative Mario Diaz-Balartof Florida, explaining the tactic.

The bills are likely to be debated on the House floor overcoming days, not all at once. Democrats have rejected thepiecemeal approach and Obama has said he will veto the measures.


In as speech at a Maryland construction company on Thursday,Obama challenged Republicans to "stop this farce" by allowing astraight vote on a spending bill. He reiterated he will notnegotiate on the spending bill or the debt ceiling.

Obama said there were enough Republicans willing to pass aspending bill immediately if House Speaker John Boehner wouldallow a vote on a bill without partisan conditions attached, aso-called clean vote. But Obama said the speaker was refusing todo so because "he doesn't want to anger the extremists in hisparty."

"My simple message today is 'Call a vote,'" Obama said."Take a vote. Stop this farce, and end this shutdown right now."

Work in Congress was interrupted on Thursday afternoon whenthe U.S. Capitol was locked down briefly due to gunshots firedoutside the building. One female suspect was shot dead after abrief car chase across downtown Washington. Police said itappeared to be an isolated incident.

The security alert halted work in both the House and theSenate and briefly diverted attention from the shutdown thattook effect at midnight on Monday (0400 GMT on Tuesday), leavingnearly a million federal workers sidelined without pay and manyothers in the private sector suffering from the knock-on effect.

The Capitol Police who responded to the incident are workingwithout pay due to the shutdown - they are deemed essential soremain on the job, but their pay is frozen.


In his speech earlier, Obama warned that as painful as thegovernment shutdown was, a default caused by a failure to raisethe debt limit would be dramatically worse for the economy.

Though some moderate Republicans have begun to questiontheir party's strategy, Boehner so far has kept them largelyunited with the small bills to re-open national parks, restorehealth research and other parts of the government most visiblyaffected by the shutdown.

The Tea Party Express, one of the anti-tax groups in theconservative Tea Party that has led the fight against Obamacare,sent an email to supporters on Wednesday evening saying that asmany as 12 Republicans had indicated they were willing to "giveup on the fight" and join Democrats in voting for a funding billwithout conditions.

"We need your immediate support to put pressure on the weakRepublicans to pass a sensible solution that allows America toavoid the Obamacare train-wreck, while fully funding the federalgovernment," the group said in its email.

The U.S. Treasury warned on Thursday about the"catastrophic" impact of a debt default, saying a failure to paythe nation's bills could punish American families and businesseswith a worse recession than the 2007-2009 downturn.

Major stock markets fell on Thursday while the dollardropped to an eight-month low over concern the budget standoffwould merge with the coming fight over raising the U.S.borrowing limit.

The U.S. Labor Department on Thursday said the government'sSeptember employment report, the most widely watched economicdata both on Wall Street and Main Street, would not be releasedas scheduled on Friday due to the shutdown.

Despite the shutdown, Republicans have failed to derailObama's controversial healthcare law, which passed a milestoneon Tuesday when it began signing up uninsured Americans forsubsidized health coverage.

Obama blamed the shutdown on Republicans' "obsession" withreversing healthcare reforms passed in the Affordable Care Act,but noted they had passed the House of Representatives and theSenate and been deemed constitutional by the Supreme Court.

"Last November the voters rejected the presidentialcandidate that ran on a platform to repeal it," he said onThursday. "So the Affordable Care Act has gone through everysingle democratic process, all three branches of government.It's the law of the land. It's here to stay."

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