WASHINGTON (Reuters) - After weeks of impasse, President Barack Obama and top congressional leaders are aiming for "something big" as they resume budget talks on Thursday to avert an imminent default.

With Republicans showing new flexibility on taxes, Democrats say Obama will push negotiators to double their target to $4 trillion (2.5 trillion pounds) in budget savings over 10 years.

That would be an ambitious goal, but there have been a few hints of progress since talks hit a brick wall two weeks ago.

The meeting, which takes place at the White House, is due to start at 11 a.m. EDT (4 p.m. British time) and last about an hour.

Obama will propose cuts in Social Security and major reductions in Medicare, which mark a major shift for the White House, The Washington Post reported late on Wednesday, citing people in both parties with knowledge of the proposal.

In exchange, Obama would seek Republican support for increasing tax revenues, the Post reported.

Negotiators are trying to craft a deal that would allow lawmakers to say they are taking steps to keep the national debt under control even as they sign off on further borrowing.

Failure to raise the $14.3 trillion debt ceiling by August 2 could force the country to default on debt service and other obligations, a move that could push the country back into recession and send shock waves through financial markets across the globe.

A small team of U.S. Treasury officials are discussing options to stave off default if Congress fails to raise the debt limit by the August 2 deadline, sources familiar with the matter told Reuters.

Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money.

But the sources said the Treasury was looking at a number of options, including whether the administration can delay payments to try and manage cash flows after August 2.


By the end of last week, lawmakers were weighing a scaled-back deal that would cover the country's borrowing needs in the short term but force Congress to confront the issue again in a few months, when the 2012 election season will make politically painful decisions even more difficult.

Obama dismissed that idea on Tuesday, two days after he met secretly with the top Republican in Washington, House of Representatives Speaker John Boehner.

"We've got a unique opportunity to do something big," he said at a news conference, where he invited top congressional leaders to Thursday's White House meeting.

Obama's goal of $4 trillion in savings matches the figure that budget experts say is needed to keep the debt at a sustainable level. It is not clear how he would get there when the two sides have had trouble reaching half of that goal.

Obama's proposal to restrain Social Security spending could include adjusting the measure of inflation used to determine payouts for the retirement program, the Post reported.

In earlier sessions, negotiators identified roughly $2 trillion in spending cuts that could form the basis of a deal. Republicans walked out of those talks after Democrats called for an additional $400 billion in budget savings by ending a range of tax breaks that benefit wealthy people and certain businesses, like the oil and gas industry.

On Wednesday, the two Republicans who were involved in those talks indicated that they could accept some "revenue raisers" in a deal.

Senator Jon Kyl, the No. 2 Republican in the Senate, said his side had backed measures that would generate between $150 billion and $200 billion in new revenue generated by selling assets such as broadband spectrum and raising user fees.

His counterpart in the House, Majority Leader Eric Cantor, said Republicans could support ending some of the tax breaks that Democrats have proposed in return for tax cuts elsewhere.

Obama has proposed extending a payroll-tax cut that expires at the end of this year, which would add about $100 billion to budget deficits over the next 10 years. That cost could be offset by repealing tax breaks for ethanol producers, hedge-fund managers and oil and gas companies, or other elements Democrats have proposed.

"This would allow Democrats to get some tax hikes in the deal and extend the payroll tax cut, but Republicans could say they didn't vote for a net tax increase," analysts at International Strategy & Investment wrote in a research note.

Aside from Cantor and Kyl, the meeting will include Boehner, Senate Republican Leader Mitch McConnell, Senate Democratic Leader Harry Reid and House Democratic Leader Nancy Pelosi.

Democrats believe a deal needs to be in place by July 22 in order to ensure that Congress can raise the debt limit by August 2. Thursday's meeting could determine whether that is possible.

"We're going to have a really good indication by the end of this week, early next week as to whether they're actually bearing fruit or not," Republican Senator Bob Corker told Reuters Insider.

(Additional reporting by Richard Cowan, Rachelle Younglai, Tim Reid and Caren Bohan; Editing by Eric Beech)