Obama says failure to reach fiscal deal would hurt markets

By Jeff Mason

WASHINGTON (Reuters) - Financial markets would be affected adversely if U.S. lawmakers fail to agree on a "fiscal cliff" deal before Tuesday, President Barack Obama said in an interview broadcast on Sunday, while urging Congress to act quickly to extend tax cuts for middle-class Americans.

Lawmakers are seeking a last-minute deal that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to start within days. If Congress does not make that happen, the first bill brought up in the new year would be to reduce taxes for middle-income families, Obama told NBC's "Meet the Press."

"Now I think that over the next 48 hours, my hope is that people recognize that, regardless of partisan differences, our top priority has to be to make sure that taxes on middle-class families do not go up. That would hurt our economy badly," Obama said in the interview taped on Saturday.

"We can get that done. Democrats and Republicans both say they don't want taxes to go up on middle-class families. That's something we all agree on. If we can get that done, that takes a big bite out of the 'fiscal cliff.' It avoids the worst outcomes," Obama added.

Low income tax rates first put in place under Republican former President George W. Bush are due to expire at the end of the day on Monday - the last day of 2012.

Obama said that failing to reach a deal would have a negative impact on financial markets.

"If people start seeing that on January 1st this problem still hasn't been solved, that we haven't seen the kind of deficit reduction that we could have had had the Republicans been willing to take the deal that I gave them ... then obviously that's going to have an adverse reaction in the markets," he said.

RARE SENATE SESSION ON SUNDAY

Obama met with congressional leaders at the White House on Friday and declared himself cautiously optimistic about the chances of an agreement, but he noted in the interview that nothing had materialized since then.

"I was modestly optimistic yesterday, but we don't yet see an agreement. And now the pressure's on Congress to produce," he said.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have fiscal-cliff legislation to act upon.

Obama sketched out what he believed to be the most likely scenarios the end the back-and-forth between both sides. Either the congressional leaders would come up with a deal, or Democrats in the Senate would bring a bill to the floor seeking an up-or-down vote to extend tax cuts for middle income earners.

"And if all else fails, if Republicans do in fact decide to block it, so that taxes on middle class families do in fact go up on January 1st, then we'll come back with a new Congress on January 4th and the first bill that will be introduced on the floor will be to cut taxes on middle class families," he said.

Obama chided Republicans for resisting his call for tax rates to go up for the top two percent of U.S. earners despite what he viewed as significant compromises on his part to cut spending and reform expensive social programs for the poor and elderly.

"They say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they're behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected. That seems to be their only overriding, unifying theme," Obama said.

"The offers that I've made to them have been so fair that a lot of Democrats get mad at me. I mean I offered to make some significant changes to our entitlement programs in order to reduce the deficit," he said.

(Reporting by Jeff Mason; Editing by David Brunnstrom)