The U.S. government was on the brink of a partial shutdown Monday after the Democratic-led Senate and Republican-controlled House both refused to back down in a clash over scaling back President Barack Obama's landmark health law as the price for essential federal funding.

On a long day and night in the Capitol, the Senate torpedoed one Republican attempt to tie government financing to changes in the law known as "Obamacare." House Republicans countered with a second bill despite unmistakable signs their unity was fraying — and Senate Democrats stood by to reject it, as well.

That left the next move up to Speaker John Boehner and his House Republican rank- and- file, with just two hours remaining before the shutdown deadline of midnight local time.

"We're at the brink," said Senator. Barbara Mikulski, a Democrat, as House Republican leaders calculated their next move.

The stock market dropped on fears that political gridlock between the White House and House Republicans would prevail, though analysts suggested significant damage to the national economy was unlikely unless a shutdown lasted more than a few days.

Still, a shutdown would send hundreds of thousands of workers home and inconvenience millions of people who rely on federal services or are drawn to the nation's parks and other attractions. Some critical parts of the government — from the military to air traffic controllers — would remain open.

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Republicans are insisting that part of U.S. President Barack Obama's health-care law be delayed for a year as a condition of keeping the government operating. Democrats say the budget cannot be tied to the health-care law. (Win McNamee/Getty)

The State Department would continue processing foreign applications for visas, and embassies and consulates overseas would continue to provide services to American citizens

As lawmakers squabbled, Obama spoke bluntly about House Republicans. "You don't get to extract a ransom for doing your job, for doing what you're supposed to be doing anyway, or just because there's a law there that you don't like," he said. Speaking of the health care law that undergoes a major expansion on Tuesday, he said emphatically, "That funding is already in place. You can't shut it down."

Boehner responded a few hours later on the House floor. "The American people don't want a shutdown and neither do I," he said. Yet, he added, the new health care law "is having a devastating impact ... Something has to be done."

Hours before a midnight deadline, the Senate voted 54-46 to reject a proposal by House Republicans for a temporary funding bill that would have kept the government open but would have delayed implementation of the health care law for a year and permanently repeal a tax on medical devices that helps finance it.

House Republicans countered by scaling back their demands and seeking different concessions in exchange for allowing the government to remain open. They called for a one-year delay in a requirement in the health care law for individuals to purchase coverage.

The same measure also would require members of Congress and their aides as well as the president, the vice-president and the administration's political appointees to bear the full cost of their own health care coverage by barring the government from making the customary employer contribution.

The vote was 228-201, with a dozen Republicans opposed and nine Democrats in favour.

Unimpressed, the White House issued a veto threat against the bill and Senate Democrats swatted it on a 54-46 party line vote about an hour later.

Late Monday, Obama called Republican and Democratic congressional leaders but there was no breakthrough in the budget impasse. Obama said he would continue to oppose attempts to delay or cut federal financing of the health care law.

Brendan Buck, the spokesman for Boehner, said the House's top Republican told the president that the health care law was costing jobs and that it was unfair that businesses were getting exemptions from the mandate to purchase insurance but American families were not.

Obama did embrace one Republican measure Monday, signing legislation that would ensure that members of the armed forces would continue to get paid during any shutdown. The House had passed the legislation over the weekend and the Senate approved it Monday.

If there is no breakthrough, the government faces its first partial shutdown in 17 years. It would force 800,000 federal workers off the job without pay and rattle the shaky U.S. economic recovery.

Ramping up pressure on Republicans to avoid a post-midnight government shutdown, Obama warned such a move would "throw a wrench into the gears" of a recovering economy and hurt hundreds of thousands of government workers.

Budget Battle

Speaker of the House John Boehner returns to his office after a vote at the Capitol in Washington, Monday. (J. Scott Applewhite/Associated Press)

Earlier, the president said he was willing to discuss budget issues with congressional leaders. He added, "The only way to do that is for everybody to sit down in good faith without threatening to harm women and veterans and children with a government shutdown."

For all the Republican defiance, it appeared that Senate Majority Leader Harry Reid and fellow Democrats had the upper hand in the fast-approaching end game, and that Republicans might soon have to decide whether to allow the government to remain open — or come away empty-handed from a bruising struggle with Obama.

For the first time since the showdown began more than a week ago, there were also some signs of open dissent from some Republican lawmakers from the strategy that has been carried out at the insistence of conservative tea party-aligned lawmakers working in tandem with Republican Senator Ted Cruz of Texas.

Several Republican senators and House members said they would be willing to vote for straightforward legislation that would keep the government functioning, with no health care-related provisions.

Republican Representative Charles Dent said he was willing to vote for stand-alone legislation that would keep the government running and contained no health care-related provisions. "I would be supportive of it, and I believe the votes are there in the House to pass it at that point," the fifth-term congressman said.

Other Republicans sought to blame Democrats for any shutdown, but Dent conceded that Republicans would bear the blame, whether or not they deserved it.

Stocks sink on shutdown concerns

The prospect of a shutdown contributed to a decline in stock markets around the world. U.S. stocks sank as Wall Street worried the budget fight could lead to something much worse for the economy — a failure to raise the nation's borrowing limit.

Whether or not Congress averts a shutdown, Republicans are sure to move the health care fight to a must-do measure to increase the borrowing cap, which is expected to hit its $16.7 trillion cap in mid-October.

World markets

In Europe, the FTSE 100 index of leading British shares closed down by 0.8 per cent while Germany's DAX fell 0.8 per cent. The CAC-40 in France ended one per cent lower.

Japan's Nikkei 225 stock average closed 2.1 lower. Hong's Hang Seng index was down 1.5 per cent, while South Korea's Kospi was trading 0.7 per cent lower.

The S&P/TSX composite index had been down as much as 110 points but finished off 56.89 points at 12,787.19. The Dow Jones industrial average fell 128 points to end at 15, 129, while Nasdaq dropped 10 points.

Obama on Monday urged Republicans not to saddle the legislation to increase the debt ceiling with measures designed to undermine the health care law. He has vowed not to negotiate over the debt ceiling, noting that a default would be worse for the economy than a partial government shutdown.

The U.S. risks a market-rattling, first-ever default on its obligations if Congress fails to raise that limit.

Both a shutdown and a default would be politically risky ahead of next year's congressional elections.

The last time the government shut down, in 1995-1996, Republicans suffered significant political damage, and then-president Bill Clinton's political fortunes were revived in the process.

Some Republican leaders fear the public will blame their party for a shutdown if they insist on crippling health care reform. But individual House members may face a greater risk by embracing a compromise. Many represent heavily partisan congressional districts, and voters in primaries have ousted lawmakers, particularly Republicans, they see as too moderate.

Since the last government shutdown, temporary funding bills have been noncontroversial, with neither party willing to chance a shutdown to achieve legislative goals it couldn't otherwise win.

But with the three-year-old health care law nearing implementation, hardcore tea party conservatives are determined to block it.

Economic impact

Late last week, Ratings agency Moody's suggested a three- to four-week partial government shutdown could reduce GDP growth by as much as 1.4 percentage points for the fourth quarter.

There are few issues Republicans feel as passionately about as the health care reform, which they have dubbed "Obamacare" They see the plan, intended to provide coverage for the millions of Americans now uninsured, as wasteful and restricting freedom by requiring most Americans to have insurance.

A crucial part of the plan will begin Tuesday, whether or not the government partially closes: enrollment in new health care exchanges for millions of Americans. That's because most of the program is paid from monies not subject to congressional appropriations.

For all the controversy about other matters, the legislation in question is a spending bill — and there was little if any disagreement about the spending-related issues.

The House and Senate have agreed to fix spending for a wide swath of federal programs at an annual level of $986 billion for the budget year that begins Oct. 1, the same as for the 12 months just ending.