* New optimism about reaching a compromise
* No deal yet, White House wary of six-week debt extension
* Large parts of the government still closed
* Investors send stocks higher but Treasury bills suffer
By Richard Cowan and Thomas Ferraro
WASHINGTON, Oct 11 (Reuters) - President Barack Obama andcongressional Republican leaders inched toward resolving theirfiscal impasse on Friday, but struggled to agree on the lengthand terms of a short-term deal to increase the U.S. debt limitand reopen the government.
Obama met Senate Republicans at the White House and spoke byphone to House of Representatives Speaker John Boehner asnegotiations intensified on how to get hundreds of thousands offederal workers back on the job and extend the government'sborrowing authority past the Oct. 17 limit.
It was hard to gauge the progress of talks, as all sidesrefused to divulge many of the specific details of what is beingdiscussed.
But both sides spoke with new optimism about the possibilityof avoiding a fiscal crisis. Lawmakers were expected to workthrough the weekend with a goal of finishing a deal by earlynext week.
Economists have warned that a debt default would createglobal economic chaos, and analysts warned on Friday that if theshutdown lasts more than a month it would cause a sharp slowdownin fourth-quarter economic growth.
Obama wants the debt ceiling raised for longer than the sixweeks first proposed by Republicans, and Republicans want acommitment to broader deficit-reduction talks from the WhiteHouse.
"The two of them agreed that all sides need to keeptalking," White House spokesman Jay Carney told reporters afterthe call between Boehner and Obama. "It at least looks likethere is a possibility of making some progress here."
House Republicans will meet at the Capitol on Saturdaymorning to discuss their options after sending the White House aproposal that included the short-term increase in the debt limitthat would clear the way for re-opening the government.
The House Republican proposal called for cuts in entitlementprograms like the Medicare health plan for seniors to replacetwo years of the automatic spending cuts known as"sequestration" agreed to last year by Congress, senior aidessaid.
"The good thing is the negotiations are ongoing. That ismuch more progress than has been the case lately," HouseMajority Leader Eric Cantor of Virginia said.
But Carney said the short-term increase proposed byRepublicans would not provide enough certainty for the economyand would put the country back on the verge of default duringthe end-of-year holiday season.
"A debt ceiling increase at only six weeks tied to budgetnegotiations would put us right back where we are today in justsix weeks, on the verge of Thanksgiving and the obviouslyimportant shopping season leading up to the holidays," Carneysaid.
At a White House meeting with Senate Republicans on Friday,Obama expressed concerns the proposed debt-limit extension wastoo short and also talked about the need for new revenues aspart of any long-term deficit reduction plan, Republican SenatorOrrin Hatch of Utah said.
Large portions of the U.S. government shut Oct. 1 afterObama and Democratic lawmakers rejected House Republicans'demands for delays to Obama's healthcare reforms in exchange fortemporary government funding. The fight has since shifted to thedebt limit and spending on other programs.
'A DIFFICULT EXPERIENCE'
Hatch said he left the meeting feeling the fiscal fight willstill be a "difficult experience."
But Senator Bob Corker, a Republican from Tennessee, saidsenators "had to leave there knowing that probably in the verynear future we will have these issues behind us."
The new sense of optimism sent U.S. stocks higher on Friday,extending gains from a major rally in the previous session.. But U.S. Treasury bills maturing in lateNovember and throughout December spiked as banks and major moneymarket funds shy away from holding debt with any risk of delayedinterest or principal payments.
"If the shutdown lasts through the end of October, theeconomic damage would be significant, reducing real GDP as muchas 1.5 percentage points in the fourth quarter," said MarkZandi, chief economist at Moody's Analytics in West Chester,Pennsylvania.
An unlikely coalition of the heads of the U.S. Chamber ofCommerce, AFL-CIO labor federation and United Way Worldwidejoined together on Friday to warn about the dangers of aprolonged economic impasse.
"While we may disagree on priorities for federal policiesand we even have conflicting views about many issues, we are incomplete agreement that the current shutdown is harmful and therisk of default is potentially catastrophic for our fragileeconomy," they wrote in a letter to Obama and members ofCongress.
Obama spoke by phone to a group of about 150 leaders ofmajor businesses on Friday afternoon, the White House said.
"The president reiterated that his first order of businessis to urge Congress to reopen the government and remove thethreat of default, and then he is willing to engage withCongress on a long-term budget," the White House said.
Time was running short, with the shutdown in its 11th dayand less than a week to go before the Treasury Departmentexhausts its ability to borrow money to pay the government'sbills.
Any deal that is struck by leaders could face a revolt fromrank-and-file conservatives in both the House and Senate.
Texas Senator Ted Cruz, a Tea Party favorite who has been aleader of conservatives demanding delays or defunding of Obama'shealthcare law before they will approve a budget deal, took ahard line at a conference of conservative activists.
In a speech frequently interrupted by hecklers but warmlyembraced by the smaller-government Tea Party faithful, he saidthe country must "stop that train wreck, that disaster, thatnightmare that is Obamacare."
Senate Democratic Leader Harry Reid will hold a vote onFriday or Saturday on a measure giving a one-year debt ceilingincrease without conditions. It is expected to be blocked bySenate Republicans. The chamber may then move quickly on ashorter time frame, even if it is not Democrats' first choice.
Senate Republicans were discussing a series of differentideas, including a quick reopening of the government coupledwith a debt limit increase and the repeal of an unpopularmedical device tax that would raise revenues to pay for thehealthcare law.
Reid on Friday publicly criticized Republican calls for ashort extension of the borrowing authority.
"We do not believe a six-week delay of a catastrophicdefault is enough to get the economy the confidence it needs,"Reid said on the Senate floor.
A Reuters/Ipsos poll on Friday showed more Americans blameRepublicans for the shutdown, which also appears to be damagingthe party's reputation on issues such as healthcare and theeconomy.
Nearly one-third of Americans - 32 percent - say Republicansare responsible for the shutdown, up from 26 percent a week ago.About 4 percent said Democrats were mostly at fault for theshutdown, down from 5 percent. And 16 percent blamed Obama, upfrom 14 percent.
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