Treasury Secretary Timothy Geithner expressed confidence that Congress would raise the debt ceiling and said on Monday that top Republicans had taken "default off the table."
"Despite what you hear, people are moving closer together," Geithner told CNBC television. "You have seen the leadership of the Republican party ... take default off the table. That's encouraging," he said.
Congress must raise the country's $14.3 trillion borrowing limit before August 2 in order to give the U.S. Treasury the authority to borrow more and keep the government solvent.
President Barack Obama had set a Friday deadline for Congressional leaders from both parties to agree on a deal to raise the country's debt ceiling. He said the July 22 deadline would give Congress enough leeway to write and pass legislation before Aug. 2, when the government will run out of money to pay its bills.
With five days left to go and no agreement in sight, Republicans and Democrats were crafting a fallback plan to avert a U.S. default.
Both parties agree on the need to raise the U.S. debt ceiling, which caps how much the United States can borrow, but are deeply divided along ideological lines over how to do it.
The stalemate in Washington, along with debt problems in Europe, is unnerving financial markets worldwide amid fears that they could spiral into a global crisis. World stocks dipped and gold prices hit record highs above $1,600 an ounce as nervous investors sought a safe haven.
"There's a perfect storm happening on a global macroeconomic basis with no debt deal here and the ongoing issues in Europe, and the market is looking at all these things and is fairly anxious," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.
The top Republican in the Senate, Mitch McConnell, has submitted a plan that would essentially give Obama the power to raise the debt limit and take the political heat off Republicans. Senate leader Harry Reid hopes to begin debate on a modified version in the Democratic-led Senate this week.
McConnell's complicated plan to increase the debt limit in three stages has moved to the forefront as efforts to reach a comprehensive deficit-reduction deal have hit a wall.
Democrats and Republicans -- with an eye on 2012 elections -- are digging deeper into entrenched positions on taxes and entitlement programs such as Social Security and the Medicare healthcare program for the elderly.
Democrats want tax increases to be part of any final deficit reduction deal. Republicans say that would hurt a sputtering economic recovery and have taken aim at entitlement programs that Democrats have vowed to protect.
McConnell's plan, initially presented last week as a fallback option, is gaining traction as a viable solution in part because it would allow Republicans to avoid having to take a politically toxic vote on raising the debt limit.
Democratic aides said Reid and McConnell's staff were still trying to work out details of the plan, including spending cuts of about $1.5 trillion.
"The plan is still tenuous. We don't have the details yet. Everything is extremely fluid," a Democratic aide said.
The Senate, where Democrats have a majority, is expected to approve the final fallback plan but it is uncertain if the Republican-led House will go along.
"We (the Senate) are going to throw it to them (House Republicans) and see what happens," a Democratic aide said.
Democratic aides note that last week House Speaker John Boehner, the top U.S. Republican, declined to rule the McConnell plan in or out.