LONDON (AP) — Markets appeared Monday to take in stride the ongoing failure of U.S. politicians to agree to a budget deal in time to avoid automatic tax increases and spending cuts that many economists think could tilt the world's largest economy back into recession.
With just hours to go before the U.S. falls off the so-called "fiscal cliff," Republicans and Democrats remained divided over taxes and spending, raising the prospect that markets will start 2013 without a clear idea of America's budget policy.
Unless an agreement is reached and approved by Congress by the start of New Year's Day, more than $500 billion in 2013 tax increases will begin to take effect and $109 billion will be carved from defense and domestic programs.
Discussions in the Senate broke off Sunday night without agreement. Senators are due to reconvene at 11 a.m. EST (1600 GMT) to try to hammer out a deal before the deadline.
"With precisely zero headway made on the fiscal front resulting from the early weekend return by Congressional lawmakers, hopes are fast-fading of any sort of compromise before the end of 2012," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.
However, it's not the first time that budget discussions in the U.S. have gone down to the wire only for a deal to be eventually reached.
Many investors remain confident that some sort of deal will be struck in time following positive noises coming out from late Sunday discussions between Senate Minority Leader Mitch McConnell, a Republican, and Vice President Joe Biden, a Democrat.
Even if a deal is not reached in time, many investors think that the possible damage can be contained for a while at least.
A backup proposal that would address only a few issues is expected to be presented by Senate Majority Leader Harry Reid, a Democrat, if a bipartisan deal is not reached.
"It is likely that many of the fiscal cliff measures allow a certain amount of room within which the government can introduce measures to refrain from any tax increases," said Joshua Mahony, an analyst at Alpari.
The prospect of counter-measures to offset the "fiscal cliff" impact helps explain why markets were fairly calm in Europe and Asia, and Wall Street was poised to open higher on the last day of a year that's seen many indexes post strong gains, partly through rising hopes over Europe's 3-year debt crisis.
In Europe, the FTSE 100 index of leading British shares closed down 0.5 percent at 5,897.81. For the year as a whole, the FTSE ended 5.8 percent higher.
The CAC-40 in France closed 0.6 percent higher on the day at 3,641.07. In 2012, it rose 15.2 percent.
Those European indexes that were open only traded for half the day. Others, including Germany's DAX, were closed. The DAX was one of the world's best-performers in 2012 with its annual rise of 29.1 percent.