The Republican-controlled House approved emergency legislation Friday night to avoid an unprecedented government default and Senate Democrats scuttled it less than two hours later in hopes of a better deal.

"We are almost out of time" for a compromise, warned President Barack Obama as U.S. financial markets trembled at the prospect of economic chaos next week. The Dow Jones average fell for a sixth straight session.

Legislators in both parties said they were determined to avoid a default, yet there was little evidence of progress, or even significant negotiations, on a compromise during a long day of intense political manoeuvring.

The House vote was 218-210, almost entirely along party lines, on a Republican-drafted bill to provide a quick $900 billion increase in U.S. borrowing authority — essential to allow the government to continue paying all its bills — along with $917 billion in cuts from federal spending.

It had been rewritten hastily overnight to say that before any additional increase in the debt limit could take place, Congress must approve a balanced budget-amendment to the Constitution and send it to the states for ratification. That marked a concession to Tea Party-backed conservatives and others in the rank and file who had thwarted House Speaker John Boehner's attempt to pass the bill Thursday night.

"Today we have a chance to end this debt limit crisis," Boehner declared, his endgame strategy upended by rebels within his own party.

But the changes he made to the House Republican bill further alienated Democrats. And they complicated prospects of a compromise that could clear both houses and win Obama's signature by next Tuesday's deadline.

House bill stalls in Senate

At the other end of the Capitol, Senate Democrats rejected the measure without so much as a debate. The vote was 59-41, with all Democrats, two independents and six Republicans joining in opposition.

 Apple has more cash than the U.S. Treasury

New figures show that Apple Inc. now has more cash on hand (including short-term and long-term investments) than the U.S. government:

  • Apple's cash hoard: $76.2 billion (June 25)
  • U.S. Treasury's cash: $73.8 billion (July 27)

Other tech giants with big cash positions:

  • Microsoft: $52.8 billion (June 30)
  • Cisco: $42.4 billion (Apr. 30)
  • Google: $39.1 billion (June 30)
 Sources: Company filings, U.S. Treasury

Moments later, Senate majority leader Harry Reid unveiled an alternative that would cut spending by $2.4 trillion and raise the debt limit by the same amount, enough to meet Obama's terms that it tide the Treasury over until 2013.

Reid invited Republicans to suggest changes, saying, "This is likely our last chance to save this nation from default."

The Senate Republican leader, Mitch McConnell of Kentucky, accused Democrats of "rounding up 'no' votes to keep this crisis alive," and noted the House had passed two bills to raise the debt limit and the Senate none.

It was not immediately clear how negotiations might proceed over the weekend.

Late Friday, Democrats accused McConnell of refusing to negotiate. Meanwhile, CNN reported that McConnell was insisting that the White House be present at any negotiations.

The House, eager to return the Senate's favour rejecting the Boehner bill, set a vote to reject Reid's proposal on Saturday. The Senate set a test vote for shortly after midnight on Sunday, a middle-of-the-night roll call that underscored the limited time available to legislators.

At the same time Reid appealed for bipartisanship, he and other party leaders accused Boehner of caving in to extremists in the Republican ranks — "the last holdouts of the Tea Party," Senator Richard Durbin of Illinois called them.

Republicans conceded that the overnight delay had weakened Boehner's hand in the endgame with Obama and Senate Democrats.   

But the Ohio Republican drew applause from his rank and file when he said the House, alone, had advanced legislation to cut deficits, and that he had "stuck his neck out" in recent weeks in hopes of concluding a sweeping deficit reduction deal with Obama.

"To the American people, I would say we’ve tried our level best," Boehner said before the House vote.

'Political exercise'

The White House called the bill a non-starter. Press secretary Jay Carney issued a statement that called it a "political exercise" and said congressional leaders should turn their efforts to a compromise that Obama can sign by Tuesday.


U.S. Senate majority leader Harry Reid invited Republicans to suggest changes to his plan to cut spending and lift the debt limit. ((Yuri Gripas/Reuters))

The developments occurred one day after Boehner was forced to postpone a vote in the House for fear the earlier version of his measure would suffer a defeat.

Administration officials say that without legislation in place by Tuesday, the Treasury will no longer be able to pay all its bills. The result could inflict significant damage on the economy, they add, causing interest rates to rise and financial markets to sink.

Executives from the country's biggest banks met with U.S. Treasury officials to discuss how debt auctions will be handled if Congress fails to raise the borrowing limit before Tuesday's deadline.

But Carney said the administration did not plan to provide the public with details Friday on how the government will prioritize payments.

Private economists believe the government would pay bond holders first. If the Treasury missed a bond payment, the country would likely default on its debt. That could rattle markets and increase borrowing costs on most consumer and business loans, many of which are linked to the rates on treasury bonds.

Some economists say the government will have enough cash on hand to meet interest payments and some other payments until as late as Aug. 15.

Downgrade would push up interest rates

"We must have a deal by Tuesday to pay our bills," Obama said. "If we don't, we could lose our triple-A rating … because we didn't have a triple-A political system to match our credit rating."

A lower credit rating would effectively mean a tax increase for Americans, he said, in the form of higher interest rates on mortgages and business and consumer loans. Raising the debt ceiling does not mean spending more money, Obama said.

Moody's Investors Service, a credit rating agency, said late Friday that the United States should be able to keep its triple-A credit rating as long as Washington works out a deal that lets it continue to pay bondholders.

At the White House, Obama cited the potential toll on the economy as he urged legislators to find a way out of gridlock.

He said that for all the partisanship, the two sides were not that far apart. Both agree on initial spending cuts to take effect in exchange for an increase in the debt limit, he said, as well as on a way to consider additional reductions in government benefit programs in the coming months.

"And if we need to put in place some kind of enforcement mechanism to hold us all accountable for making these reforms, I'll support that, too, if it's done in a smart and balanced way," he said.

That went to the crux of the conflict — his insistence that Congress raise the government's borrowing authority by enough to avoid a repeat of the current crisis during the heat of the 2012 election campaigns.

Republicans have resisted, accusing him of injecting purely political considerations into the debt limit negotiations.

But Boehner's failure to line up the votes for his legislation Thursday night seemed to embolden Democrats.

Obama asked his 9.4 million followers on Twitter to send messages to Republicans.

"The time for putting party first is over. If you want to see a bipartisan compromise, let Congress know. Call. Email. Tweet," Obama wrote in a tweet, signed "-BO."

With files from CBC News