Top Republicans and Democrats worked behind the scenes on a compromise to avert a crippling US default, looking to salvage a last-minute deal from rival debt plans that have little chance of winning congressional approval on their own.

With financial markets increasingly on edge, the White House said it saw no alternative to striking a deal to raise the government's borrowing limit by an Aug. 2 deadline to allow the world's largest economy to keep paying all of its bills.   

'People keep looking for off-ramps. They don't exist,' White House spokesman Jay Carney told reporters, saying the government would be 'running on fumes' after the deadline unless the limit was raised.

Even if a deal is reached to lift the $14.3 trillion debt ceiling, a budget plan that flinches from hefty cuts in the deficit may result in a downgrade of the top-notch US credit rating. This would push up US borrowing costs and rattle global investors.   

The faltering moves to break the deadlock are weighing on markets. Along with the uncertainty, Wall Street was hit by weak earnings and lackluster economic data, suffering its worst day in eight weeks.

'The market is beginning to show real concerns in terms of a default. I don't think it's going to happen ... (but) are we headed for a downgrade? That is becoming more of a possibility as each day goes by,' said Peter Cardillo, chief market economist at Avalon Partners in New York.

The US dollar rebounded after a sell-off this week but policy makers in countries from Japan to France fretted over how a crisis of confidence in US solvency could spill into the international economy.

Worried investors shifted funds into gold and the Swiss franc, traditional safe havens that both rose to record highs in dollar terms.

The US Treasury will lay out a plan in the next few days for how the government will operate if the Aug 2 deadline is missed.

Leaders in the Republican-controlled House of Representatives and Democratic-controlled Senate scrambled to find common ground but complications with their competing plans could send attempts at a compromise right down to the wire.

'You're going to have to make sure that you can have a spending cut package that can pass both chambers -- there's going to be some work to do there,' senior White House adviser David Plouffe said on the PBS show 'NewsHour.'    

Senate Democratic Leader Harry Reid, House Speaker John Boehner, the top Republican in Congress, and Senate Republican Leader Mitch McConnell have been talking about how to break the impasse, several lawmakers said.   

President Barack Obama, a Democrat, opposes the two-step Boehner plan because it would extend borrowing authority only temporarily, risking a rerun of the standoff in the run-up to the November 2012 election when Obama will seek a second term.

Boehner, facing a mutiny by Republican lawmakers aligned with the fiscally conservative Tea Party movement, has been feverishly canvassing support for a vote on Thursday on his reworked deficit reduction bill. It is expected to be close.   

At a morning meeting, he appeared to be firming up support from several wavering lawmakers as he told them to 'get your ass in line' behind what he has described as the best chance to win the deep spending cuts that Republicans seek.   

Reid says Boehner's plan would be 'dead on arrival' in the 100-seat Senate. On Wednesday, 53 senators -- all 51 Democrats and the two independents who usually vote with them -- signed a letter to Boehner saying they would not back his bill.

But Boehner's negotiating position could be strengthened if his measure gets the 217 votes needed in the House. If it fails, Boehner would be weakened and his job may be on the line.

Senate Democratic aides said they hoped support would grow for Reid's one-step remedy, which Obama backs, if Boehner's plan is killed, either by the House or Senate.

If Congress does not increase the debt limit, the United States could eventually suffer its first full government default. That could put its faltering economic recovery into reverse and send shock waves through the global economy.  - Reuters