US takes a step back from the brink

The United States was on the verge of clinching a last minute deal to avert the "fiscal cliff" on Monday night despite threats of rebellion by liberal Democrats and conservative Republicans.

With hours to go until the midnight deadline when taxes would rise for every American family, President Barack Obama appeared at the White House to announce that a compromise was almost within reach.

"Today it appears that an agreement to prevent this New Year's tax hike is within sight but it's not done," Obama said in a relaxed and often jocular speech in front of middle class workers who would be hit by the tax rises. "There are still issues left to resolve, but we're hopeful that Congress can get it done."

The deal being forged in the Senate looked likely to include higher taxes only on households making more than $450,000 a year - nearly twice the threshold Obama had sought during the election.

The significant concession on taxes was likely to inflame the liberal wing of the president's own party and earlier in the day Left-wing senators signalled that they could try to sabotage the deal.

"No deal is better than a bad deal. And this looks like a very bad deal the way this is shaping up," said Senator Tom Harkin, a Democrat from Iowa.

He added that for Obama to sign off on the agreement would "lock in forever the idea that $450,000 a year is middle-class in America" when the country's average household income was about $50,000 (pounds 31,000).

Last night, the deal still needed to be finalised and passed by the Senate, where procedures allow even a single senator to derail a vote by "filibustering", before being sent to the House of Representatives. Sources told Reuters news agency that Republicans would back it.

Senator Mitch McConnell, the Republican leader in the Senate, echoed Mr Obama's remarks, saying: "I can report that we've reached an agreement on all of the tax issues. We are very, very close".

Mr Obama also sought to reassure Democrats that he would continue to fight for a more comprehensive deficit reduction plan based on a "balanced approach" between new revenues and spending cuts.

"If Republicans think I will finish the job of deficit reduction through spending cuts alone... without asking also equivalent sacrifice from millionaires or companies with a lot of lobbyists, if they think that's the formula for how we solve this thing, then they've got another think coming. That's not going how it's going to work," Obama said.

Despite the tension across Washington and the cloud of uncertainty over the American economy, Mr Obama struck a surprisingly relaxed tone during his appearance at the White House, at one point joking about going to an audience member's house for New Year's celebrations. Republicans reacted furiously to the statement. Senator John McCain, the president's 2008 election opponent, accused Obama of endangering the deal he had just called on Congress to pass. "I guess I have to wonder and I think the American people have to wonder whether the president really wants this issue resolved or whether it is to his short-term political benefit for us to go over the cliff?" the senator asked.

McCain said Obama's remarks would "clearly antagonise" members of the Republican-controlled House of Representatives, where many members had signed pledges to reject tax rises even for the wealthiest Americans.

The Republican leadership was bracing for a rebellion from the Right over the compromise and would likely be forced to rely on Democratic votes to move the deal through. Earlier last month, House Republicans rejected a proposal by their own leaders that would have limited tax rises to only those making more than $1 million a year.

Few details of the deal itself emerged last night but tax rates look likely to rise for the highest-income earners to about 39%, the level they were at during the Clinton era.

It also looked likely to delay a series of swingeing cuts that would fall on the military budget and domestic spending programmes. Unemployment benefits for two million out of work Americans would also be extended for another year.

The talks comes more than a year after both parties agreed to design the "cliff" as a way of forcing themselves to compromise over a broad deal for deficit reduction. Obama said last night that the hoped-for "grand bargain" had proved impossible "with this Congress, at this time" but expressed hope that the new Congress sworn in this week may be able to make more progress.