The White House and Senate Republicans sorted through disputes over taxing the wealthy and cutting the Defence Department and other federal agencies as Monday’s midnight deadline for avoiding a “fiscal cliff” drew to within hours.

At stake are sweeping tax hikes and across-the-board spending cuts set to take effect at the turn of the year. Taken together, they’ve been dubbed the fiscal cliff, and economists warn the one-two punch which leaders in both parties have said they want to avoid could result in a big jump in employment, turmoil in financial markets and send the still-fragile economy back into recession.

Republican Senate Minority Leader Mitch McConnell spoke repeatedly on Sunday to Vice President Joe Biden, a former Senate colleague, in hopes of settling remaining differences and clinching a breakthrough that has evaded the two sides since President Barack Obama’s November re-election.

In one indication of the eleventh-hour activity, aides said the President, Mr. Biden and top administration bargainer Rob Nabors were all working late at the White House, and Mr. McConnell was making late-night phone calls as well.

The House and Senate planned to meet on Monday, a rarity for New Year’s Eve, in hopes of having a tentative agreement to consider. Yet despite the flurry of activity, there was still no final pact.

Unless an agreement is reached and approved by the start of New Year’s Day, more than $500 billion in 2013 tax increases will begin to take effect and $109 billion will be carved from defence and domestic programs

“There is still significant distance between the two sides, but negotiations continue,” Democratic Senate Majority Leader Harry Reid said shortly before the Senate ended a rare Sunday session. “There is still time to reach an agreement, and we intend to continue negotiations.” Mr. Harry Reid said.

The U.S. faces the fiscal cliff because tax rate cuts enacted in 2001 and 2003 during President George W. Bush’s administration expire on Dec. 31. The pending across-the-board reductions in government spending, which will slice money out of everything from social programs to the military, were put in place last year as an incentive to both parties to find ways to cut spending. That solution grew out of the two parties’ inability in 2011 to agree to a grand bargain that would have taken a big bite out of the deficit.

In a move that was sure to irritate Republicans, Mr. Reid was planning absent a deal to force a Senate vote on Monday on Mr. Obama’s campaign-season proposal to continue expiring tax cuts for all but those with income exceeding $200,000 for individuals and $250,000 for couples.

Attached to the measure which the Republicans seemed likely to block would be an extension of jobless benefits for around 2 million long-term unemployed people. The plan was described by Sen. Richard Durbin of Illinois, the chamber’s No. 2 Democrat.

The House and Senate met on Sunday ready to debate an agreement or at least show voters they were trying. But the day produced alternating bursts of progress and pitfalls, despite Senate chaplain Barry Black’s opening prayer in which he asked the heavens, “Look with favour on our nation and save us from self-inflicted wounds.”

In one sign of movement, Republicans dropped a demand to slow the growth of Social Security and other benefits by changing how those payments are increased each year to allow for inflation.

Mr. Obama had offered to include that change, despite opposition by many Democrats, as part of earlier, failed bargaining with Republican House Speaker John Boehner over a larger deficit reduction agreement. But Democrats said they would never include the new inflation formula in the smaller deal now being sought to forestall wide-ranging tax boosts and budget cuts, and Republicans relented.

“It’s just acknowledging the reality,” Republican Sen. Susan Collins said of her party’s decision to drop the idea.

There was still no final agreement on the income level above which decade-old income tax cuts would be allowed to expire. While Mr. Obama has long insisted on letting the top 35 per cent tax rate rise to 39.6 per cent on earnings over $250,000, he’d agreed to boost that level to $400,000 in his talks with Boehner. Republican senators said they wanted the figure hoisted to at least that level.

Senators said disagreements remained over taxing large inherited estates. Republicans want the tax left at its current 35 per cent, with the first $5.1 million excluded, while Democrats want the rate boosted to 45 per cent with a smaller exclusion.

The two sides were also apart on how to keep the alternative minimum tax from raising the tax bills of nearly 30 million middle-income families and how to extend tax breaks for research by business and other activities.

Republicans were also insisting that budget cuts be found to pay for some of the spending proposals Democrats were pushing.

These included proposals to erase scheduled defence and domestic cuts exceeding $200 billion over the next two years and to extend unemployment benefits. Republicans complained that in effect, Democrats would pay for that spending with the tax boosts on the wealthy.

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