President Barack Obama said he was "modestly optimistic" a last-minute deal was possible with Republicans to avert a "fiscal cliff" crisis that could spark a recession and rock global markets.
Obama said after meeting top congressional leaders that Senate Democrats and Republicans would work overtime this weekend to try to head off a $500 billion time bomb of tax hikes and spending cuts before a January 1 deadline.
"We had a constructive meeting today... I'm modestly optimistic that an agreement can be achieved," the president said, as the mood lifted somewhat after earlier pessimism had sparked a Wall Street selloff.
Entangled in divided Washington, where power is shared, Obama and Republicans have feuded for months over what to do about tax cuts for all Americans first passed by ex-president George W. Bush due to expire on Tuesday.
Obama, sensing a mandate from his re-election last month, wants to raise taxes on the rich but exempt the middle class. Republicans want only to close tax loopholes to raise revenue and demand significant spending cuts in return.
But if nothing is done by the deadline, everyone will get a tax hike.
Following the White House talks, Democratic Senate Majority Leader Harry Reid and Republican Minority Leader Mitch McConnell will now take the lead in seeking a deal before Tuesday.
But any agreement would also have to pass the House of Representatives, where there is doubt that any deal signed off by the Democratic president would win favor with restive conservatives in the Republican caucus.
Obama steeled his optimism with a warning: if Reid and McConnell fail to forge a pact, he will demand a vote on his own fallback plan, which would raise taxes on those earning more than $250,000 a year and extend unemployment insurance for two million people.
If Republicans block the move, the White House could argue that Obama's foes saddled middle class Americans with unpopular tax hikes just to protect millionaires.
While each side must for the sake of appearances be seen to be seeking a deal, the easiest way out of the mess might be to allow the economy to go over the cliff, but to fix the problem in the first few days of next year.
Under that scenario, Republicans who are philosophically opposed to raising taxes could back a bill to lower the newly raised rates on almost all Americans without formally hiking taxes on anyone.
Upping the pressure, Reid said late Friday he was readying Obama's package for a vote by Monday if necessary.
The president also vented frustration at America's dysfunctional political system, after he, and lawmakers had to break of Christmas and New Year's vacations following Congress's inability to act well ahead of the deadline.
"Ordinary folks, they do their jobs. They meet deadlines. They sit down and they discuss things and then things happen," Obama said.
"The notion that our elected leadership can't do the same thing is mind-boggling to them. It needs to stop."
McConnell said he was "hopeful and optimistic" after the talks, also involving Republican House Speaker John Boehner and Democratic House Minority Leader Nancy Pelosi.
An aide to Boehner said the talks focused on "potential options and components for a plan that could pass both chambers of Congress" and said the speaker told Obama that the Senate must go first, before the House acts.
Earlier, Wall Street picked up pessimistic signs ahead of the talks.
The Dow Jones Industrial Average dropped 158.20 points or 1.21 percent, as Washington's perennial gridlock threatened to deal what Obama described as a "politically self-inflicted wound" to the economy.
If no deal is reached by January 1, all Americans will face a tax hike and massive and automatic budget cuts will come into force that budget experts say could trigger a new US recession and cause a spike in unemployment.
It is not clear, however, whether the last ditch Reid and McConnell effort would avert the spending cuts or deal with Obama's separate request to raise the $16 trillion ceiling on government borrowing.
Failure to act on either issue would simply set up a new political showdown early in 2013.
Republican Senator Bob Corker earlier complained that Obama and Democrats in Congress had balked at cutting spending on social programs weighing on the budget and inflating the deficit.
"We're going to end up with a small, kick-the-can-down-the-road bill that creates another fiscal cliff to deal with this fiscal cliff. How irresponsible is that?" Corker told reporters.
Retiring Democratic Senator Ben Nelson warned Americans might need a "parachute."