By Kathleen Hennessey and Christi Parsons, Washington Bureau
July 24, 2011, 10:13 p.m.

Reporting from Washington— Congressional leaders missed a self-imposed weekend deadline for reaching a debt agreement that would stave off federal default, leaving Democrats and Republicans aligned behind competing proposals as financial markets watched closely for signs of progress.

House Republican leaders had hoped to reassure overseas markets with an announcement in Washington on Sunday night about a breakthrough on the stalemate before trading began in Asia. But as the day wore on, no deal emerged and the two sides met separately — to discuss strategy instead of a tentative agreement.

U.S. financial markets were bracing for the opening of trading Monday, fearful that nervous investors could flee.

In early Asian trading Monday, Pacific Rim stock markets were broadly lower, although prices weren’t collapsing. Gold, the classic refuge in times of geopolitical turmoil, initially surged to a record $1,624 an ounce in Asian futures trading, and then backed off to about $1,612, up from $1,601 on Friday.

U.S. lawmakers have eight days to raise the nation’s $14.29-trillion debt limit before an Aug. 2 deadline, after which administration officials say the government will no longer be able to pay all of its bills.

Congress also is working against another clock: Legislation must be introduced early in the week to allow enough time to clear both chambers’ procedural hurdles before the deadline.

Even if Washington reached a stopgap measure on the debt ceiling to avert default, some large investors said the greatest risk to markets was that major credit-rating firms could downgrade the nation’s AAA rating.

“The risk of losing our AAA rating has increased significantly,” said Mohamed El-Erian, head of money management giant Pimco in Newport Beach.

Speaking on “Fox News Sunday,” Secretary Timothy F. Geithner said, “We’re running out of runway. I never thought they would take it this close to the edge.”

Democrats and Republicans claimed to be moving off the edge — but in different directions.

House Speaker John A. Boehner (R-Ohio) and fellow Republicans were backing a two-step process that would raise the limit in stages in return for more than $3 trillion in spending cuts over 10 years. Legislation was expected to be introduced Monday, according to a GOP aide.

But Democrats, who control the White House and the Senate, insisted that the two-step plan is a non-starter. President Obama has said he wants a deal that raises the limit through 2012 in one vote — taking the debt limit out of the political fray until after the next election cycle.

Late Sunday, Senate Majority Leader Harry Reid (D-Nev.) issued a statement saying talks had broken down because “a short-term extension would not provide the certainty the markets are looking for.”

Reid forged ahead with his own proposal, one intended to meet the GOP’s original parameters. The Reid plan would raise the debt limit by $2.7 trillion — enough to cover borrowing through 2012 — and match that with spending cuts of the same size, an ingredient Republicans have demanded since the debt talks began. Reid, who was still working out the details, offered a key sweetener to Republicans: He said his plan would not include increased tax revenues.

Obama, Reid and House Minority Leader Nancy Pelosi (D-San Francisco) huddled at the White House to discuss the plan Sunday evening. The president held off endorsing it, saying he wanted to hear his staff’s analysis, but advisors said the president probably would be open to the proposal.

The day ended with the two dueling plans trying to avoid the grim fate of roughly half a dozen proposals put forth in recent weeks, a period of especially dramatic political theater and little legislative progress. Every other proposal has imploded when it could not bridge the now-familiar gulf of differences between the two sides or overcome factions within the parties.

Along with the dollar-for-dollar increase, Republicans have refused any proposal that raises taxes. Obama and congressional Democrats have sought a long-term increase — and insisted that any large package achieve deficit reduction by also raising revenues.

But the constant negotiation has yielded substantial common ground.

Republicans and Democrats largely agree on a set of spending cuts included in the first phase of the GOP proposal, amounting to about $1 trillion over 10 years. It’s the second phase — in which a congressional committee would be charged with finding nearly $2 trillion in savings — that runs into significant hurdles.

Reid’s proposal, aimed at overcoming some of those hurdles, could face others within his own party, depending on the nature of the cuts. Congressional liberals in particular have vowed to protect Medicaid and Medicare from significant reductions.

Pelosi said Reid’s plan would not slash the entitlement programs and said that the major pieces of his proposal “have already been supported by Republicans in the past months.”

In a conference call with his members, Boehner made a plea for unity as the showdown week began in the debt battle between a new, emboldened GOP House majority and Obama.

“If we stand together as a team, our leverage is maximized, and they have to deal with us. If we’re divided, our leverage gets minimized,” Boehner said, according to a source familiar with the call who spoke on the condition of anonymity because of the sensitive nature of the talks.

The speaker also prepared Republicans for compromise, saying, “It’s going to require some of you to make some sacrifices.”

Obama and Boehner spoke by phone briefly Sunday, but officials declined to say what they discussed.

Boehner pulled out of negotiations with the White House on Friday, saying he could not agree to the president’s request for tax increases. White House officials said Sunday that they weren’t ruling out the possibility that the deal with Boehner — the so-called grand bargain — could still come together as a last-minute exit from the bluffing game.

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