With global markets on edge, congressional Democrats and Republicans struggled through another day of difficult talks but failed to agree on cutting U.S. spending and raising the debt limit.

That has to happen to prevent an unprecedented Aug. 2 default.

Political leaders had hoped to strike a deal Sunday to reassure investors around the world that the nasty partisan fight in Washington was nearing an end, lifting fears that the United States would be unable to cover its debts when the current borrowing limit expires a week from Tuesday.

The stakes are high. Major global credit ratings agencies have threatened to downgrade the U.S. government's triple-A credit rating unless there are assurances that the United States will not go into default for the first time in its history. A default could mean that the U.S. government could not pay all its bills starting next month, including interest and principal on Treasury bonds, Social Security cheques to retirees, and payments to government contractors.

Lowering the U.S. credit standing likely would raise the cost of U.S. government borrowing. Americans seeking home mortgage or car loans would see interest rates climb, as would people with outstanding credit card balances.

President Barack Obama says that effectively amounts to a tax increase on Americans. Many economists think default could push the U.S. economy back into recession or worse, while causing chaos in the global economy.

Both Republicans and Democrats in Congress and Obama have sought to position themselves to avoid possible blame.

House Republicans have pledged not to raise taxes

The biggest obstacle to a long-term debt limit extension is coming from the Republican-controlled House of Representatives, which includes dozens of new Republican members elected last November with strong support from the small-government, low-tax tea party movement. Nearly all House Republicans have signed a public pledge not to raise taxes for any reason and could face primary election challenges in the run-up to the 2012 vote. They fear the wrath of voters in conservative districts for failing to live up to the promise on taxes. Members of the House must face the voters every two years.

Obama also will run for re-election in 2012 and does not want to see his campaign for a second White House term bogged down in another nasty political fight over increasing the country's borrowing limit.

Obama has insisted on an increase in tax revenues, mainly through closing loopholes and letting cuts for wealthy Americans expire, to cover some proposed spending cuts in the U.S. social safety net, programs like the Social Security pension plan and Medicare health insurance coverage for people over age 65. Republicans steadfastly refuse to accept higher taxes.

Under the leadership of an embattled Speaker John Boehner, Republicans laboured over a plan that would boost the debt limit immediately by roughly $1 trillion — about enough to last through this year — while locking in slightly more in spending cuts. Another package combining trillions more in savings and another extension of the debt limit would be considered later.

Senate Majority Leader Harry Reid, a Democrat, whispers to Republican House Speaker John Boehner before a meeting on the debt limit increase on Saturday. Harry Hamburg/Associated Press

"It won't be 'Cut, Cap and Balance' as we passed it," he said, referring to a House measure — killed in the Democratic-controlled Senate on Friday — that would have required spending cuts of an estimated $6 trillion as well as congressional approval of a constitutional balanced budget amendment to send to the states for ratification.

In a conference call with members of his caucus, Boehner was quoted by one participant as saying the new approach is "going to require some of you to make some sacrifices."

White House opposes short-term debt limit increase

Late Sunday afternoon, Obama met Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, the top Democrat in the lower chamber of Congress, for a progress report.

Afterward, a White House official said Obama and the Democratic leaders "reiterated our opposition to a short-term debt limit increase."

Markets around the world were watching nervously.

U.S. congressional leaders were supposed to be in last-ditch negotiations on Sunday — without the participation of Obama — to reach a bipartisan agreement.

Republicans had sought as much as $4 trillion in deficit cuts over a decade as a condition for raising the nation's debt limit.

Boehner had declared he wanted to announce the outlines of a plan by 4 p.m. ET Sunday, to assure investors of the nation's financial and political stability before Asian stock markets open Monday. That deadline came and went with little movement.

Obama's chief of staff said Sunday the president would veto any last-minute debt package from Congress unless it extends the nation's borrowing limit into 2013. Bill Daley was asked on NBC's Meet the Press if Obama would veto a plan that doesn't extend the limit into 2013, and Daley replied: "Yes."

U.S. Treasury Secretary Timothy Geithner backed Obama's stance Sunday while appearing on CNN, saying the Republican two-stage proposal won't garner enough Democratic support to pass Congress. Pelosi has already said she would not support a proposal that does not solve the debt-ceiling problem at least through 2012.

Doing it the Republican way would require boosting the debt ceiling again in a few months, noted Geithner.

Politicians, the Treasury chief said, "cannot leave the threat of default hanging over the American economy for a longer period of time."

With files from CBC News