* Senate's top Democrat and top Republican express optimism
* Discussing raising debt ceiling through mid-Feb - source
* Government would reopen through middle of January - source
By Richard Cowan and Thomas Ferraro
WASHINGTON, Oct 14 (Reuters) - U.S. senators said they wereclosing in on a deal Monday that would reopen the government andpush back a possible default for several months, though manyhurdles remained as a Thursday deadline drew near.
The Senate's top Democrat and top Republican both said theyhoped they could soon reach an agreement that would allow themto avert a looming default and end a partial government shutdownthat has dragged on for 14 days so far.
"I'm very optimistic that we that we will reach an agreementthat's reasonable in nature this week," Senate Democratic LeaderHarry Reid said on the Senate floor.
Lawmakers are racing against the clock, with U.S. officialsestimating that the federal government could run out ofborrowing capacity on Oct. 17.
The plan under discussion would raise the $16.7 trilliondebt ceiling by enough to cover the nation's borrowing needs atleast through mid-February 2014, according to a source familiarwith the negotiations.
It also would fund government operations through the middleof January, keeping in place the across-the-board "sequester"spending cuts that took effect in March, though governmentagencies would have more latitude to ease their impact. It wouldalso set up a new round of budget talks that would try to strikea bargain by year's end.
Any deal would also have to win approval in the House ofRepresentatives, where conservative Republicans have insistedthat any continued government funding must include measures toundercut President Barack Obama's signature health law - anonstarter for Democrats.
The deal would not resolve the disagreements over long-termspending and health care that led to the crisis in the firstplace. It would amount to a clear retreat for Republicans whohave sought to tie any continued funding and borrowing authorityto measures that would undercut Obama's Affordable Care Act.
Republicans have taken a hit in opinion polls since thestandoff began and some in the party worry it could hurt theirchances to win control of the Senate in next year's midtermelections.
A Washington Post/ABC News poll released on Monday foundthat 74 percent of Americans disapprove of the way congressionalRepublicans have handled the standoff, compared with a 53percent disapproval rating for Obama.
Senate Republican Leader Mitch McConnell of Kentucky echoedReid's comments that a deal could come together soon.
"I share his optimism that we we're going to get a resultthat will be acceptable to both sides," he said on the Senatefloor.
The White House postponed a planned 3 p.m. (1900 GMT)meeting with congressional leaders in order to give negotiatorsmore time to work out a deal.
The Treasury Department says it cannot guarantee that theU.S. government will be able to pay its bills past Oct. 17 ifCongress does not raise the debt ceiling by then.
A default would likely come by Nov. 1 as Treasury would nothave enough tax revenue coming in to cover interest payments,retirement benefits and other obligations.
WEIGHING ON THE ECONOMY
It is unclear whether Congress can meet that Oct. 17deadline. Even if Republicans and Democrats in the Senate reachagreement on Monday, hard-liners such as Texas RepublicanSenator Ted Cruz might be able to exploit Senate rules to delaya vote for several days.
House Speaker John Boehner also could face an insurrectionthat could threaten his position as Washington's top Republicanif he tries to advance a bill over the objections ofrank-and-file conservatives in that chamber.
"If the Senate comes to an agreement, we'll review it withour members," Boehner spokesman Kevin Smith said.
Though Treasury likely will have enough cash on hand to meetits obligations for a week or so, it might be forced to pay ahigher interest rate on debt it is due to issue on Thursday.
Banks and money market funds are already shunning somegovernment securities that are often used as collateral forshort-term loans and to facilitate many other transactions. InChina, the largest foreign holder of U.S. debt, the state newsagency Xinhua said it was time for a "de-Americanized world."
Though some Republicans have argued that the governmentcould avoid serious consequences by prioritizing interestpayments over other types of spending, that view is not widelyheld by the public.
A Reuters/IPSOS poll released on Tuesday found that only 25percent believe the debt ceiling issue is "overblown."
U.S. stocks were buoyed by prospects of a deal. The S&P 500Index closed up 0.41 percent while the Nasdaq CompositeIndex ended 0.62 percent higher.
The government shutdown, now in its 14th day, is beginningto weigh on the economy. The hundreds of thousands of federalemployees who have been temporarily thrown out of work arelikely to get back-pay when the standoff is resolved. But theyaren't getting paid now, forcing many to dial back on personalspending and cancel holiday travel plans.
The crisis is only the latest in a series of budget battlesin recent years that have repeatedly spooked investors andconsumers. The uncertainty has weighed on the economy andboosted the unemployment rate by 0.6 of a percentage point, orthe equivalent of 900,000 jobs since late 2009, according to anew estimate by the Peter G. Peterson Foundation, a think tank.
Foreign leaders and business executives have urgedWashington to resolve the crisis before it does further damage.
"This is all bad for America, bad for the economy, bad forjob growth, bad for consumer confidence, and the quicker we getit resolved, the better," Terry Lundgren, chief executive ofretailer Macy's Inc, told Reuters.
Republicans in the Senate are pushing to include slightmodifications to the Affordable Care Act. One would toughenincome verification for those seeking health insurance subsidiesunder the law. Another could delay a reinsurance fee included inthe law that otherwise would start in 2014, according to alabor-union source.
Throughout the shutdown, Obama has said Republicans mustagree to reopen the government and extend the debt ceilingbefore the two sides can begin talks on spending or tweaks tohis Affordable Care Act.
That position has not changed.
"We will not pay a ransom for Congress reopening thegovernment and raising the debt limit," the White House said ina statement on Monday morning.
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