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US House Speaker John Boehner tabled a plan to avert the fiscal cliff that left out tax increases for the wealthy and was rejected within an hour by the White House.
The proposal also highlights divisions among factions of the Republican Party.
Mr Boehner's plan partly entails targeting $US800 billion in revenue over a decade from overhauling the tax code, closing loopholes and deductions.
Republican Senator Jim DeMint of South Carolina was one of the loudest dissenters.
"Speaker Boehner's $800 billion tax hike will destroy American jobs and allow politicians in Washington to spend even more," Mr DeMint says in a statement.
The comments may signal a repeat of the tactics of the so-called Tea Party faction within the GOP that stalled talks on lifting the federal debt ceiling last year and ultimately led to a credit rating downgrade.
The schism could be overstated, though Reuters reports the Republican leadership is trying to bring the Tea Party into line, removing what it called Tea Party stalwarts Tim Huelskamp and Justin Amash from the budget committee. Mr Huelskamp reportedly called it "a vindictive move".
Conservative think tanks also balked at the proposal, which the Heritage Foundation called "utterly unacceptable".
The deadline for averting the fiscal cliff, some $US607 billion of tax increases and spending cuts that kick in on January 1, is edging closer.
Allowing the automatic cuts and tax hikes risks plunging the world's biggest economy back into recession and driving the jobless rate, now 7.9%, sharply higher through 2013, economists say.
President Barack Obama called Mr Boehner's plan, which includes $US2.2 trillion in new revenue and spending cuts, "out of balance" in an interview with Bloomberg TV.
Yet it may yet signal progress as Mr Obama says he is willing to accept cuts to entitlements and realises he will not get all that he wants in negotiations. It is now down to the White House to counter-offer.
Stocks on Wall Street fell in late trading. The Dow Jones Industrial Average was down 0.2% and the Standard & Poor's 500 Index declined 0.3%. The tech-laden Nasdaq Composite fell 0.5%.
The threat of the US economy being derailed by Washington intransigence looms as figures this week show manufacturing has weakened.
The Institute for Supply Management's index of national factory activity fell to 49.5 last month, from 51.7 in October on a scale where 50 marks the difference between contraction and expansion. November's reading was the lowest in more than three years.
Investors doubt lawmakers will manage to fix what is wrong with the US economy any time soon.
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co, says in a report on Pimco's website that the next four years "will likely face structural economic headwinds that will frustrate the American public".
Most of the developed world may be facing real growth of 2% or less "over the foreseeable future".
"Investors should expect future annualised bond returns of 3-4% at best and equity returns only a few percentage points higher," he wrote in his December column.
His picks were commodities such as oil and gold, US inflation-protected bonds, high-quality municipal bonds and non-dollar emerging-market stocks.
Gold futures have fallen to a four-week low in the face of Washington's stalemate, with spot gold recently at $US1693.56 an ounce. Crude oil has also weakened, with Brent crude trading at $US110.85 a barrel.
The euro recently traded at $1.3095 and earlier traded up to $1.3107, the highest in almost five weeks.
The common currency has benefited from Greece's plan to buy back some of its debt, which has lifted hopes that Europe is managing to navigate through its debt morass and stalled economy.