Obama, congressional leaders meet as shutdown wears on

By Jeff Mason and Thomas Ferraro

WASHINGTON (Reuters) - President Barack Obama met with Republican and Democratic leaders in Congress on Wednesday to try to break a deadlock that has shut down wide swaths of the federal government, but a solution seemed unlikely as both sides dug in for what could be a long stalemate.

As hundreds of thousands of federal employees faced a second day without pay, leaders of the Republican-controlled House of Representatives and the Democratic-led Senate offered token concessions that were quickly dismissed by the other side. Obama, meanwhile, scaled back a long-planned trip to Asia.

Republicans want to tie continued government funding to measures that would undercut Obama's signature healthcare law, while Obama and his Democrats say that is a non-starter.

The White House meeting between Obama and House of Representatives Speaker John Boehner, House Democratic Leader Nancy Pelosi, Senate Democratic Leader Harry Reid and Senate Republican Leader Mitch McConnell looked unlikely to yield a breakthrough.

"We're a little confused as to the purpose of this meeting," said McConnell spokesman Don Stewart earlier on Wednesday.

The shutdown, which took effect Monday at midnight (0400 GMT Tuesday), has raised questions about Washington's ability to carry out its most essential duties.

Though it would do relatively little damage to the world's largest economy in the short term, global markets could be roiled if Congress also fails to raise the debt limit before borrowing authority runs out in coming weeks.

The shutdown has closed landmarks like the Grand Canyon and prevented some cancer patients from receiving cutting-edge treatment.

United Technologies Corp, which makes Sikorsky helicopters and other items for the military, said it would be forced to furlough as many as 4,000 employees, if the U.S. government shutdown continues through next week, due to the absence of government quality inspectors.

OBAMA EXASPERATED

"Am I exasperated? Absolutely I'm exasperated. Because this is entirely unnecessary," Obama told CNBC television. "I am exasperated with the idea that unless I say to 20 million people, 'You can't have health insurance,' these folks will not reopen the government. That is irresponsible."

The U.S. Army's top general said the shutdown was significantly harming day-to-day operations, and intelligence leaders say it is undermining their ability to monitor threats. A Federal Reserve official said it could delay the central bank's ability to assess whether its monetary stimulus efforts are still needed.

The uncertainty in Washington has forced the White House to scale back an Asia trip that was designed to reinforce U.S. commitment to the region.

Obama scuttled two stops on a planned four-country tour and left visits to two other countries up in the air. He was due to leave on Saturday and return a week later.

Secretary of State John Kerry will instead visit Malaysia and the Philippines. Obama is weighing whether to attend diplomatic summits in Indonesia and Brunei, a White House official said.

Despite the disruption, Boehner's Republicans have failed to derail Obama's controversial healthcare law, which passed a milestone on Tuesday when it began signing up uninsured Americans for subsidized health coverage.

Though some moderate Republicans have begun to question their party's strategy, Boehner so far has kept them united behind a plan to offer a series of small bills that would re-open select those parts of the government most visibly affected by the shutdown.

The House is expected to vote later on Wednesday and Thursday on measures that would fund veterans care, medical research, national parks, the District of Columbia and the Army Reserve.

The measures are likely to be defeated in the Democratic-controlled Senate, and Obama said he would veto them if they reached his desk.

Still, they allowed Republicans to charge that their adversaries are standing in the way of help for elderly veterans and young cancer patients.

"Will they now say 'no' to funding for veterans, our National Parks and the National Institutes of Health?" asked Boehner spokesman Michael Steel.

Reid told Republicans he would engage in talks about tax reform, farm policy and other pressing issues that Congress has failed to address once Republicans agreed to re-open the government without conditions. Republicans dismissed that idea.

A Reuters/Ipsos poll indicated that 24 percent of Americans blamed Republicans for the shutdown, while 19 percent blamed Obama or Democrats. Another 46 percent said everyone was to blame.

BIGGER FIGHT LOOMS

The shutdown fight is rapidly merging with a higher-stakes battle over the government's borrowing power that is expected to come to a head soon.

Treasury Secretary Jack Lew has said the United States will exhaust its borrowing authority no later than October 17.

The government could have difficulty paying pension checks, interest charges and other bills after that point.

Many Republicans see the debt limit vote as another opportunity to undercut Obama's healthcare law or extract other concessions - an approach that business groups say could lead to disaster.

"You can re-litigate these policy issues in a political forum, but they shouldn't use the threat of causing the U.S. to fail on its ... obligations to repay on its debt as a cudgel," Goldman Sachs chief executive Lloyd Blankfein told reporters after he and other financial-industry executives met with Obama.

Some Democrats have begun to consider asking Obama to unilaterally raise the debt ceiling on his own - a move that could lead to years of court battles. The White House has said that approach is not feasible.

Asked whether there is a push underway among Democrats to convince Obama that he should use this power, a senior House Democrat who asked not to be identified said: "No, not at this point."

Stock investors on Wednesday appeared to show growing anxiety over the standoff after taking the news in stride on Tuesday. The S&P 500 and the Nasdaq both closed down 0.1 percent.

A short-term shutdown would slow U.S. economic growth by about 0.2 percentage points, Goldman Sachs said on Wednesday, but a weeks-long disruption could weigh more heavily - 0.4 percentage points - as furloughed workers scale back personal spending.

The last shutdown in 1995 and 1996 cost taxpayers $1.4 billion, according to congressional researchers.

(Additional reporting by Susan Heavey, Patricia Zengerle, Richard Cowan and Mark Felsenthal in Washington, Ann Saphir in San Francisco and Adrian Croft in Brussels; Writing by Andy Sullivan; Editing by Tim Dobbyn and Jackie Frank)

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