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By Jeff Mason
WASHINGTON (Reuters) - Hopes rose on Sunday that U.S. lawmakers could reach at least a limited deal to prevent the still-recovering economy from tumbling off a "fiscal cliff" at the New Year, sending the country into another recession.
Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked on a compromise over the weekend to stop automatic tax hikes for most Americans on January 1. Any agreement needs to be rushed through both chambers of Congress before midnight on Monday.
The main focus of negotiations was tax hikes on the wealthy, an increase sought by President Barack Obama but opposed by Republicans, particularly fiscal conservatives in the House of Representatives.
"Well, there are certainly no breakthroughs yet between Senator McConnell and Senator Reid, but there's a real possibility of a deal," Senator Charles Schumer, a Democrat from New York, said on the ABC program "This Week."
"I don't disagree with Chuck," said Senator Jon Kyl, a Republican from Arizona.
Another Republican senator, Lindsey Graham, conceded that an agreement would end up raising income taxes on the wealthy, thus sparing the rest of the country from the looming income tax hikes.
"President Obama is going to get tax rate increases. The president won," Graham tweeted, echoing earlier comments he made on "Fox News Sunday." He told the show that the chances of a bipartisan deal before the New Year's deadline were "exceedingly good."
Obama has alternatively offered Republicans a deal to increase income taxes for households earning over $250,000 a year, and over $400,000 a year.
Any deal on taxes in the Senate might meet resistance in the House from conservative Republicans.
If the politicians cannot agree, then tax increases and across-the-board government spending cuts will begin on January 1. That would take $600 billion out of the economy, push unemployment up and curb federal spending.
"I think people don't want to go over the cliff if we can avoid it," said Graham, a conservative.
Putting pressure on Congress, Obama made a rare appearance on a Sunday television talk show where he warned of the fallout on financial markets if the two sides did not reach an agreement.
"If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have, had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," Obama said on NBC's "Meet the Press."
He said he would avoid tax increases for most Americans, even if the talks fall apart.
"And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," Obama said.
The Senate - where the Democrats hold sway - was scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.
The Republican-controlled House also returns on Sunday and can vote on any deal in the evening if need be.
(Additional reporting by Tabassum Zakaria, Fred Barbash and Richard Cowan. Writing by Alistair Bell)