Wall Street slides as fiscal cliff deadline looms

SHAREMARKETS in the US slid again on Christmas Eve, as lawmakers on Capitol Hill grow increasingly sceptical that a deal can be reached on the fiscal cliff budget crisis before a year-end deadline.

Investors were reacting to comments from politicians over the weekend that time had run out and the best available option was an interim patch to mitigate the January 1 imposition of mass tax rises and spending cuts.

With less than a week to go, all eyes are on the Senate after President Barack Obama urged it to pass a stop-gap measure that would extend Bush-era tax cuts for those earning less than $US250,000 ($241,000) a year, extend unemployment benefits and delay spending cuts until a full agreement can be reached.

The Senate is now the last hope to avert the fiscal cliff after the collapse last week of negotiations between Mr Obama and the Republican Speaker of the House of Representatives, John Boehner. Mr Boehner's scheme to launch his own "plan B" also failed after right-wing Republicans baulked at a compromise on tax increases.

Mr Obama is on holiday in Hawaii and will not return until after Christmas.

On Wall Street, the Dow Jones was down 51.76 points, or 0.39 per cent, at 13,139.08 ahead of an early close for the Christmas holidays. The Dow lost 120 points on Friday, its largest fall since November, as it became clear Washington was getting further away from a deal.

Failure to cut a deal by January 1 will automatically end Bush-era tax cuts that the Tax Policy Centre calculates will cost the average American $US3446 in 2013 and trigger across-the-board spending cuts. The combination, according to the Congressional Budget Office, will push the US back into recession and drive unemployment back up to 9 per cent from just under 8 per cent.

Talks between Mr Boehner and Mr Obama appeared to be progressing last week as both sides gave ground. Mr Obama increased the spending cuts he was prepared to make and Mr Boehner reportedly proposed several compromises, including raising taxes on those earning over $US1 million a year.

Steve Bell, director of economic policy at the Bipartisan Policy Centre, a Washington think tank, said the split in the Republican ranks made a deal look increasingly uncertain. "This is a continuation of the balkanisation of the Republican caucus that has been going on for four years," he said.

He said elements within the party were determined not to compromise and that Mr Boehner would have to forge an agreement with Democrats and moderate Republicans that was likely to be worse than a deal he could have agreed if his party had hung together.

"I see this a gross betrayal of the Speaker," Mr Bell said. "The consequences are likely to be negative for the economy."