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U.S. lawmakers hope Senate leaders can break fiscal impasse as deadline looms

By Paul Eckert and Lisa Lambert

WASHINGTON, Oct 13 (Reuters) - U.S. lawmakers voiced tentative optimism Sunday that fiscal crisis talks between Senate leaders would pave the way to a deal to avert a government default and reopen the government, but Democrats and Republicans remained far apart on details.

As the clock ticked down to a Thursday deadline for raising the U.S. debt ceiling, necessary to avoid a possible government default that would roil world financial markets, both Democratic and Republican senators said the fact their leaders were meeting represented progress.

"It's a breakthrough. Hard to imagine, but it's a breakthrough," Dick Durbin, the second-ranking Democrat in the Senate, told NBC's "Meet the Press" program.

"The conversation that started yesterday between Senator (Mitch) McConnell - the Republican Senate leader - and Senator (Harry) Reid I think has the promise of finding a solution," he said.

Reid, the Senate majority leader, and McConnell held an initial session on Saturday and agreed to meet again on Sunday.

Saturday's meeting, however, failed to dispel uncertainty about their ability to reach an agreement quickly to end a partial government shutdown and increase the nation's borrowing authority.

Durbin offered no concrete reason for optimism, stressing the dire consequences of failure and his hope that "sensible people prevail" in a crisis that began with a partial government shutdown on Oct. 1.

"I don't want to be overly optimistic, but there's a lot at stake," said the Illinois Democrat.

Ohio Republican Senator Rob Portman said he also expected the two sides could reach a deal by Thursday.

Appearing on CNN's "State of the Union," Senators Susan Collins, a Republican, and Amy Klobuchar, a Democrat, agreed that a solution will be reached by Reid and McConnell before Thursday.

Among the unresolved issues are the duration of the debt ceiling increase and the level of spending Congress will approve when it finally agrees on a bill to reopen the government.

Democrats are attempting to use the negotiations to raise spending above the levels authorized by the "sequester" -stringent across the board budget cuts that took effect in March, with more reductions set for January.

Lawmakers are also scrambling to put hundreds of thousands of federal employees back to work after their failure to fund the government resulted in the partial shutdown.

Washington's debt ceiling drama played out as anxious global financial leaders gathered in the U.S. capital for annual meetings of the International Monetary Fund and Group of 20 major industrialized and emerging economies.

World Bank President Jim Yong Kim on Saturday warned the United States was just "five days away from a very dangerous moment" unless politicians produce a plan to avoid default.

"If this comes to pass, it could be a disastrous event for the developing world, and that will in turn greatly hurt developed economies as well," he told reporters after a meeting of the bank's Development Committee.

Meanwhile, U.S. stock investors, who were hoping to leave politics aside to focus on fundamentals, are likely to be more bearish on Monday amid expectations that talks to resolve the crisis will go down to the wire on Thursday.

The S&P 500 stock index generated two days of strong gains in advance of the weekend on hopes that an agreement to raise the $16.7 trillion federal borrowing limit was near.

But the lack of progress so far is expected to cause selling pressure to resume as investors start thinking the negotiations may go right up to the Oct. 17 deadline to increase the debt ceiling.

"This continual breakdown in talks likely won't have a positive effect on the markets," said Bonnie Baha, senior portfolio manager at DoubleLine Capital in Los Angeles.

"If the U.S. breaches the debt ceiling and there's any hint whatsoever that the U.S. will not meet their obligations on time, then all bets are off. We're drifting into uncharted waters here,' she added.

"There will probably be a negative reaction in the stock market but I think the pressure is really shifting to Washington now," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.