Obama, lawmakers debate taxes in latest deficit talk (Reuters)

WASHINGTON (Reuters) – President Barack Obama and top Republicans faced off over taxes and healthcare spending on Thursday as China added its voice to growing pressure on Washington to reach a deal to raise the debt limit.

After days of talks that participants described as both productive and acrimonious, the two sides are still trying to forge a deal that would cut the deficit and allow Congress to raise the $14.3 trillion borrowing limit before August 2, when the country would face default.

China, the United States' biggest foreign creditor with more than $1 trillion in Treasury debt, added to the pressure, urging Washington to adopt responsible policies to protect investor interests.

Markets reacted skittishly as an agreement remained elusive, and divisions within the Republican Party seemed to increase the difficulty of striking a deal.

The latest round of talks lasted a little over an hour, beginning at 4:24 p.m. EDT and ending at 5:43 p.m., according to the White House.

Thursday's session followed a difficult meeting the previous day, when the Democratic president clashed with Republican lawmakers and declared "Enough's enough." A leading Republican said Obama walked out of the meeting.

The two sides are at an impasse over whether some tax hikes should be a part of a deal to reduce the deficit.

"The eyes of the country are on us, the eyes of the world are on us," Treasury Secretary Timothy Geithner told reporters after meeting with Democratic senators. "We are running out of time."

Beijing's comments followed a warning by Moody's Investors Service that it might strip the gold-plated U.S. credit rating if the $14.3 trillion debt limit is not raised.

Standard & Poor's has also privately told U.S. lawmakers and business groups that it might cut the rating if the government fails to make any of its expected payments, including Social Security retirement checks, even if it makes all of its debt payments, a source in the meeting said.

BUSINESS WEIGHS IN

The U.S. Treasury has warned that it will run out of money after August 2 to pay all of the country's bills if a deal is not reached to raise the debt ceiling, which caps the amount of money the United States can borrow.

The prospect of a cut in the United States' AAA credit rating hit stocks prices globally and weakened the dollar Thursday. Bond prices fell in New York and yields rose, in part due to the Moody's warning.

Business leaders have added their powerful voice, calling on Congress to put aside politics and reach an agreement to allow the debt ceiling to be raised.

"It is an imperative that the debt ceiling be fixed and it's an imperative that the United States shows fiscal discipline," said JPMorgan Chase chief executive Jamie Dimon.

"No one, no one can tell me with certainty that a default wouldn't cause catastrophe and therefore it's irresponsible to take that chance," he told reporters.

Failure to raise the debt ceiling could spook investors, causing interest rates to surge, stock prices to plummet, push the United States back into recession and cause turmoil on global markets,

Republicans demand $2.4 trillion in spending cuts in return for covering debt needs through 2012 elections. Democrats want tax increases for the wealthy in any deal.

The two sides appear to be moving farther apart. Republicans charge that many of the spending cuts that the White House has offered are "smoke and mirrors."

The two sides agree on less than $1.4 trillion in spending cuts, the No. 2 Republican in the House of Representatives, Republican Eric Cantor, said on Wednesday, down from roughly $2 trillion a week ago.

Federal Reserve Chairman Ben Bernanke said the spiraling fallout of a potential default -- higher interest rates and thus a bigger deficit -- would be a "self-inflicted wound."

In testimony on Capitol Hill, the U.S. central bank chief also inserted a word of caution that overzealous spending cuts in the very short term could derail the fragile economy.

(Additional reporting by Donna Smith, Rachelle Younglai, Doug Palmer and Caren Bohan in Washington, and Ben Blanchard and Sabrina Mao in Beijing; Writing by Deborah Charles and Jeff Mason; Editing by Eric Beech and Christopher Wilson)