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Stocks on Wall Street reversed earlier losses after US House Speaker and senior Republican John Boehner said he was optimistic that a deal could be reached to head off the looming fiscal cliff.
Mr Boehner said he was willing to put revenues on the table for negotiation if accompanied by spending cuts and that he was optimistic lawmakers could "avert this crisis sooner rather than later".
The Dow Jones Industrial Average rose 0.6% and the Standard & Poor's 500 Index was up 0.3%, having been down nearly 1% earlier in the session. US Treasuries also strengthened as fixed interest investors bet there is a chance negotiations falter. The yield on the 10-year note fell 2 basis points to 1.617%.
President Barack Obama is seeking a budget agreement to avoid $US607 billion of automatic tax increases and spending cuts that kick in on January 1, just 33 days away.
Mr Obama is embarking on a series of meetings with company executives, including Goldman Sachs chief Lloyd Blankfein, to press his case and is set to meet his presidential election rival Mitt Romney tomorrow.
But there is plenty of noise to suggest markets will be held captive to Washington for the next few weeks or longer. Erskine Bowles, who was co-chairman of Mr Obama's 2010 fiscal commission, gave a 33% probability of a deal by the end of the year and the same odds that no deal would be reached.
"That still leaves that one-third that we could actually have real chaos and no deal, and I think that would be a disaster," Mr Bowles said in breakfast meeting in Washington, Bloomberg reported.
"I'm really worried. I believe the probability is we're going over the cliff," he told journalists on the edges of the meeting.
Mr Boehner also said he continued to oppose the expiration of tax cuts for top earners. While according to the Huffington Post, Republican Tom Cole told colleagues that even though he does not want the top tax rate bumped up to 39.6% from 35% his party should take that deal for now.
The willingness of Republicans to take the standoff down to the wire is not clear. Last year they effectively allowed America's credit rating to be downgraded before allowing the debt ceiling to be raised and ensuring the federal government could pay its bills.
The Congressional Budget Office says failure to avert the crisis could push the economy back into recession and drive the jobless rate up to 9.1% by the end of 2013 from 7.9% now.
Economic data out of the US was not reassuring either. Sales of new homes fell 0.3% to an annual pace of 368,000 last month, Commerce Department figures showed. That missed the forecast in a Bloomberg survey of 390,000 sales.
The Federal Reserve's Beige Book business survey, based on accounts from the 12 district Fed banks, was scheduled for release at 2pm. Washington time, which is expected to show the world's biggest economy is continuing to grow at a modest pace.
On the London Stock Exchange, shares of BP slipped 0.4% to 429.40 British pence. The energy giant has been temporarily banned from new US federal contracts as part of the punishment meted out for the Deepwater Horizon oil spill in 2010.
BP has already agreed to plead guilty to criminal misconduct over the spill and pay fines of $US4.5 billion.
Equity markets in Europe were broadly stronger. Germany's DAX 30 gained 0.2% and France's CAC 40 was up 0.4%. The Stoxx 600 rose just 0.1%.
In Spain, banks rescued as part of the European bailout announced they will shrink in size to regain control of their balance sheets. BFA-Bankia will eliminate 6000 jobs, sell assets and close branches and is forecasting a 19 billion euro loss this year. It aims to return to profit next year.