U.S. debt talks break down in acrimony

With the deadline just 11 days away for raising the federal government's borrowing limit, a stern-faced Obama expressed deep frustration with Boehner for walking away and demanded that he and other congressional leaders meet him at the White House on Saturday.

Boehner said he could not overcome disputes with Obama over taxes and entitlement spending and said he would now try to hammer out a deal with the Democratic-controlled Senate to increase the country's $14.3 trillion debt limit by Aug. 2.

"We have run out of time," Obama said at a hastily called news conference, saying it was "hard to understand why Speaker Boehner would walk away from this kind of deal."

A deep divide over tax revenue derailed the latest negotiations, ending an ambitious bid to craft a $3 trillion deficit-cutting plan that now seems beyond reach.

The world's biggest economy will run out of money to pay its bills without a deal by the August deadline. Failure to act could push the United States back into recession and unleash global financial chaos.

"If not reversed within the next few days through crisis negotiations, this breakdown will be highly detrimental to the already fragile health of both the U.S. and global economies," Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co, which oversees $1.2 trillion in assets, told Reuters.

Boehner said he would begin talks with Senate leaders "in an effort to find a path forward". An aide said a deal needs to be set by Monday.

A senior White House official warned the United States now faces the "very real prospect" that its top-notch credit rating will be downgraded.

Wall Street has spent weeks betting Washington will raise the debt ceiling in time. But with dwindling options for the type of long-term deficit-reduction plan that could appease the ratings agencies, markets could become unnerved quickly.

"The longer they draw this out and closer we get to the eleventh hour, the more possibility there is that there will be a signal from the bond market in the form of yields rising as people become more and more concerned it doesn't get through," said Scott Carmack, assistant portfolio manager at Leader Capital in Portland, Oregon.

Ratings agencies want major deficit controls and have threatened to downgrade U.S. bonds even if clearance is given to raise the debt ceiling.

As Friday's dramatic turn of events unfolded, Obama insisted he made an "extraordinarily fair" offer to Boehner but when the Republican stopped returning his calls on Friday it became clear that he would not accept it.

"Where is the leadership?" Obama asked angrily.

Obama, who is trying to appeal to moderate independent voters he needs to win re-election in 2012, summoned Democratic and Republican leaders to the White House on Saturday in an effort to find a way to raise the debt limit. Boehner said he would attend.

"I expect them to have an answer in terms of how they intend to get this thing done over the course of the next week," Obama said.

Republicans and many Democrats are refusing to raise the debt limit unless it is accompanied by steep spending cuts to tackle rising budget deficits.

Putting the onus on Obama, Boehner said: "The president is emphatic that taxes have to be raised. As a former small businessman, I know tax increases destroy jobs."

Many Republicans have refused to accept a debt limit deal if it includes revenue increases, which Democrats insist must be part of a broad deficit reduction package.

Boehner said he was confident Congress would act next week to raise the debt limit but to do so will require overcoming resistance from Tea Party conservatives in his own party.

But Boehner could run into problems with some of his fellow Republicans for having signaled a willingness to give ground on revenue increases in closed-door talks at the White House.

Administration officials said they had been close to a package of spending cuts, healthcare reform and revenue boosting changes in the tax code to cut the deficit by $3.5 trillion to $4 trillion over 10 year when Boehner pulled out.

A key sticking point was how much revenue would be raised via tax reform, with Obama seeking $1.2 trillion over 10 years compared to $800 billion put on the table by Boehner.

Options for moving forward on a debt-ceiling deal remain limited. Until the Obama-Boehner talks hit full stride, there had been talk of a convoluted plan put forth by Republican Senate leader Mitch McConnell.

Originally intended as a fallback option if all else failed, it would call for Obama to get the authority and the blame for raising the debt ceiling in three phases before the November 2012 election when he is running for re-election.

But it was unclear whether that idea was still viable, even with revisions to meet Democrats' demands.