WASHINGTON — Key US lawmakers Thursday reached a compromise to cut subsidies for ethanol, which would revamp a policy that has come under heightened scrutiny for diverting large amounts of corn to fuel and impacting food prices.

Democratic Senator Dianne Feinstein of California said the agreement with two farm state senators, Democrat Amy Klobuchar of Minnesota and John Thune of South Dakota, would reduce the US budget deficit by some $1.3 billion.

The measure, if enacted and signed by President Barack Obama, would end the 45-cent-per-gallon ethanol blender credit on July 31, saving $2 billion through the remainder of 2011.

A 54-cent-per-gallon tariff on ethanol imports -- criticized by Brazil for hindering US imports of ethanol from sugar cane -- also would expire on July 31.

But the measure would extend a tax credit for cellulosic biofuel production, currently set to expire at the end of 2012, for three years, and be expanded to include fuels from other crops and algae.

"This agreement is the best chance to repeal the ethanol subsidy, and it's the best chance to achieve real deficit reduction. Absent this agreement, taxpayers stand to lose $1.33 billion -- that was the bottom line for me," Feinstein said in a statement.

"I believe this bipartisan agreement should be included in the deficit reduction package that will likely accompany a vote on raising the debt limit, and I hope the president will consider that approach."

The ethanol subsidy had been estimated to cost some $6 billion annually, drawing criticism that it was providing incentives to divert corn, a major part of the global food supply, to fuel. But farm state lawmakers had resisted a sudden halt in the program.

Thune said in a separate statement that the deal "allows for a transition to a more sustainable model of incentives for domestic renewable fuel production while reducing the nation?s deficit by $1.3 billion."

Thune said, "Domestic biofuels production in South Dakota and throughout the country continues to play an important role in reducing our nation?s dependence on foreign oil and creating American jobs. I look forward to moving our bipartisan plan through both the Senate and the House of Representatives."

Brian Jennings of the American Coalition for Ethanol called the deal "the art of the possible."

"Despite its shortcomings, this compromise represents the art of the possible given the temperament of Congress and buys us time to tackle unfinished business by building a new and broader coalition. ACE will support efforts in Congress to enact this legislation into law by the end of July."

A coalition of livestock and poultry said the deal was a step forward but not enough.

"The resulting compromise still provides new federal funds for corn-based ethanol, money that would be better spent reducing the deficit or encouraging the development of energy sources that do not compete with feed needs," said the American Meat Institute, National Chicken Council and other groups.

The Brazilian Sugarcane Industry Association hailed the move.

"Brazil ended trade-distorting subsidies for ethanol more than a decade ago and eliminated its ethanol tariff early last year. We are pleased that this agreement would have the United States do the same," the group said.

"As the world's top producers of ethanol, the US and Brazil should lead by example in creating a free market for clean, renewable energy."