By Richard Cowan and Thomas Ferraro
WASHINGTON (Reuters) - Negotiations in Congress to end the fiscal impasse sputtered on Tuesday, leaving both chambers grasping for a way to reopen the government and raise the country's borrowing authority with a Thursday deadline drawing near.
The Senate halted discussions on its own plan, as it waited for the fractious Republican-controlled House of Representatives to come up with an alternative proposal ahead of the October 17 deadline, when the U.S. Treasury says the government will reach its borrowing limit.
Senate leaders had been close to a deal that would reopen the government and raise the debt limit until early 2014, while the initial alternative plan proposed by House Republican leaders failed to gain enough support in a closed-door meeting for the House to proceed.
"There are a lot of opinions about what direction to go. There have been no decisions about exactly what we will do," House Speaker John Boehner told reporters after the meeting.
"We're going to continue to work with our members on both sides of the aisle to try to make sure that there is no issue of default, and to get our government reopened," he said.
The disarray among House Republicans raised questions about what the House will be able to pass. Conservative House members, driven by support from Tea Party small-government activists, have demanded changes to Obama's signature healthcare law as part of any budget deal.
Those demands sparked the shutdown that began with the dawn of the new fiscal year on October 1, temporarily throwing hundreds of thousands of government employees out of work.
If Congress fails to reach a deal by Thursday, checks would likely go out on time for a short while for everyone from bondholders to workers who are owed unemployment benefits. But analysts warn that a default on government obligations could quickly follow, potentially causing the U.S. financial sector to freeze up and threatening the global economy.
Senate Democratic Leader Harry Reid and Republican Leader Mitch McConnell halted talks while House Republicans tried to sort out what they would support, Richard Durbin of Illinois, the No. 2 Senate Democrat, told reporters.
"We were on track and Boehner stepped in," he said. "McConnell is waiting on Boehner and Boehner is waiting on his caucus."
After Durbin's comments, markets got increasingly nervous about the prospects of a last-minute deal.
The Dow Jones Industrial Average was down 0.55 percent in late afternoon trade. The Standard & Poor's 500 Index was trading down 0.4 percent.
The House Republican proposal initially floated on Tuesday would have funded the government through January 15, and raised the $16.7 trillion debt ceiling by enough to cover the nation's borrowing needs through February 7, similar to the Senate plan, aides said.
But unlike the Senate, it would include a two-year suspension of the medical device tax included in Obama's healthcare law, and a requirement that members of Congress and the administration be covered under the law.
The House version also would not allow the U.S. Treasury to renew its extraordinary cash management measures to stretch borrowing capacity for months, which had tentatively been allowed under the Senate plan.
The White House and Senate Democrats quickly rejected the House draft plan as not workable.
'PARTISAN ATTEMPT' TO APPEASE TEA PARTY
Reid said the Republican plan was "partisan attempt to appease a small group of Tea Party Republicans who forced the government to shut down in the first place."
"I am very disappointed with John Boehner who once again tried to preserve his role at the expense of the country," Reid said.
But Republican Senator John McCain of Arizona, who has blamed House Republicans for the shutdown, blasted the White House and Senate Democrats for promptly rejecting Boehner's latest plan.
"I urge my Democratic colleagues, let's sit down and work this out," McCain declared, his voice rising. "Let's get this resolved."
"To categorically reject what the House of Representatives and the speaker are doing - and I think he is pretty courageous in what he's doing - in my view is not serving the American people," McCain said.
Obama was due to meet with House Democratic leaders at 3:15 p.m. (1915 GMT) to discuss their options.
Before the House action, Reid had said he was optimistic about reaching a final deal this week.
"There are productive negotiations going on with the Republican leader. I'm confident that we'll be able to reach a comprehensive agreement this week in time to avert a catastrophic default on the nation's bills," Reid said on the Senate floor.
Ratings firms have not yet revealed any plans to downgrade U.S. government debt.
Marie Cavanaugh, S&P's managing director for sovereign ratings, said on Tuesday during a panel discussion hosted by Democratic Representative Maxine Waters, "Standard & Poor's thinks that the current impasse over the debt ceiling and the continuing resolution is unlikely to change our rating, which is AA+ with a stable outlook."
Numerous polls show Republicans have taken a hit in opinion polls since the standoff began and the government shutdown October 1. A Washington Post/ABC News poll released on Monday found that 74 percent of Americans disapprove of the way congressional Republicans have handled the standoff, compared with a 53 percent disapproval rating for Obama.
Another survey released by Gallup on Tuesday showed American confidence in the U.S. economy fell another five points last week as the government shutdown continued.
The crisis is the latest in a series of budget battles in recent years that have hurt consumer confidence and weighed on the economy. A Monday estimate by the Peter G. Peterson Foundation, a think tank, said the uncertainty from the frequent showdowns had boosted the unemployment rate by 0.6 of a percentage point, or the equivalent of 900,000 jobs since late 2009.
(Additional reporting by David Lawder, Susan Heavey, Amanda Becker; Writing by John Whitesides; Editing by Karey Van Hall, Grant McCool and Tim Dobbyn)