Lawmakers close to deal to avoid default

WASHINGTON (Reuters) - U.S. lawmakers were close to a last-minute $3 trillion deal on Sunday to raise the U.S. borrowing limit and assure financial markets that the United States will avoid a potentially catastrophic default.

"We're very close," said Senate Minority Leader Mitch McConnell, the top Senate Republican who is playing a key role in the debt ceiling negotiations.

Prospects improved for a significant package to cut the deficit after Republican and Democratic leaders reopened stalled talks with the White House.

A senior White House official cautioned that a deal was "not there yet."

McConnell, speaking on CNN's "State of the Union," said he hoped Senate Majority Leader Harry Reid, a Democrat, would be able to present an agreement soon that he can recommend to Republican senators. Asked if a deal would emerge on Sunday, he said, "Soon."

Democratic Senator. Charles Schumer said it seemed clear that the emerging deal would raise the debt ceiling enough "so we don't have to come back to this until 2013." A key demand of Obama was to not take up the issue in 2012, an election year.

Reid pushed back a key procedural vote on a debt limit plan by 12 hours to 1 p.m. EDT on Sunday, buying time for both sides to hammer out details before Asia markets open in a few hours' time.

"There are negotiations going on at the White House now on a solution that will avert a catastrophic default on the nation's debt," Reid said late on Saturday.

"There is still a distance to go," he said.

The political gridlock over how to reduce the U.S. deficit and raise the debt ceiling has put the United States at risk of losing its top-notch AAA credit rating.

Japan, the second largest holder of U.S. debt, was increasingly alarmed that the United States would miss the Tuesday deadline, sources familiar with Japan's fiscal affairs said.

(Additional reporting by David Morgan, Dave Clarke, Alister Bull, Lily Kuo and Laura MacInnis in Washington and Michael Erman and David Gaffen in New York; Writing by Steve Holland and Stella Dawson; Editing by Sandra Maler and Vicki Allen)