The United States moved closer to a default that could damage the economy and a partial government shutdown entered its third week as Senate Democratic and Republican leaders remained at odds in their last-ditch negotiations to end the fiscal crises gripping Washington.

Congress is racing against the clock, with Treasury Secretary Jack Lew warning that the U.S. will quickly exhaust its ability to pay the bills on Thursday. Christine Lagarde, the International Monetary Fund's managing director, spoke fearfully about the disruption and uncertainty, warning on Sunday of a “risk of tipping, yet again, into recession” after the fitful recovery from 2008.

The reaction of world markets and the Dow Jones on Monday could provide the necessary jolt to Senate leaders, who represent the last, best chance for a resolution after talks between President Barack Obama and Republican leaders of the House of Representatives collapsed. U.S. futures were down sharply Monday, as light trading was expected during a holiday. Earlier, trading in Asia was muted, with markets in Tokyo and Hong Kong closed for holidays.

At issue are two normally routine pieces of legislation that have become entangled in disputes over Obama's health care overhaul and overall government spending. Congress' failure to pass a bill temporarily funding the government led to the partial shutdown, the first in 17 years. And if Congress doesn't approve a separate measure increasing the debt ceiling _ the amount of money the government is allowed to borrow _ the Obama administration says it will not be able to pay its bills, risking default.

On Sunday, Democratic Majority Leader Harry Reid and Republican Minority Leader Mitch McConnell spoke by phone but failed to agree on a deal to raise the $16.7 trillion debt limit. They also could not agree on a plan to reopen a government that shut down on Oct. 1 after conservative Republicans aligned with the tea party movement demanded that Obama defund his 3-year-old health care overhaul law.

Reid and McConnell _ five-term senators hardened by several budget disputes and years of negotiations _ remain at an impasse over yet another source of fiscal fighting: the automatic, across-the-board spending cuts known as sequestration that took effect earlier this year, as part of a previous high-stakes budget deal. Republicans want to keep spending at the reduced levels while Democrats are pressing for a higher amount.

The shutdown has furloughed 350,000 federal workers, impeded various government services, put continued operations of the federal courts in doubt and stopped the federal tax agency from processing tax refunds. Several parks and monuments remain closed, drawing a protest at the National World War II Memorial on Sunday that included conservative tea party-backed lawmakers.

“I'm optimistic about the prospects for a positive conclusion to the issues before this country today,” Reid said as the Senate wrapped up a rare Sunday session.

McConnell insisted a solution was readily available as he embraced the proposal from a bipartisan group of 12 senators, led by Republican Sen. Susan Collins and Democratic Sen. Joe Manchin that would re-open the government and fund it at current levels for six months while raising the debt limit through Jan. 31.

It also would give agencies greater flexibility in dealing with the automatic budget cuts, delay an Obamacare-related medical device tax for two years and establish income verification for individuals receiving subsidies to buy health insurance.

“It's time for Democrat leaders to take `yes' for an answer,” McConnell said in a statement.

But six Democrats in the group and a spokesman for Collins said late Sunday that while negotiations continued this weekend, there was no agreement.

Politically, Republicans are reeling, bearing a substantial amount of the blame for the government shutdown and stalemate.

Republican Sen. Bob Corker, who has been a key player in previous negotiations, told NBC's “Today” show Monday he believes the strategy of tea party-supported House Republicans to demand a retreat on the new health care law was “not one that bore fruit.”

But he charges that Senate Democrats, led by Reid, engaged in “overreach” Sunday in trying to get the Republicans to undo or roll back the automatic spending cuts that were the result of a 2011 budget deal.

McConnell and Republicans want to continue current spending at $986.7 billion and leave untouched the new round of cuts on Jan. 15 that would reduce the amount to $967 billion. Democrats want to undo the automatic reductions, plus a long-term extension of the debt limit increase and a short-term spending bill to reopen the government.

Unclear was whether any Senate deal would pass the Republican-controlled House by Thursday, though Senate Democrats were hoping  momentum and an imminent default would pressure House lawmakers. (AP)