U.S. congressional leaders saw signs of hope on Wednesday for a budget deal that would cut billions of dollars in spending in time to prevent a government shutdown.

With time running short, Republicans and Democrats said negotiators were making progress on a compromise that would fund government operations past Friday's deadline and keep more than 800,000 workers in their jobs.

I feel better about it today than I did yesterday at the same time, Dick Durbin, the No. 2 Senate Democrat, told reporters.

House of Representatives Speaker John Boehner, a Republican, told President Barack Obama in a brief morning phone call he remained hopeful of a deal, a Boehner aide said.

I think we've made some progress, Boehner told reporters, adding negotiations are not finished, not by a long shot.

Boehner criticized Obama for a failure of leadership in the budget showdown and said the House will work on a short-term bill to fund the government for another week while negotiations continue.

Obama has said he does not support another short-term extension of government funding for the current fiscal year. Temporary funding runs out at midnight on Friday.

A government shutdown, the first in 15 years, would ripple through an economy still recovering from the worst recession since the 1930s. Obama urged both parties to compromise and said failure to reach agreement would hurt the economy just as it was gaining momentum.

Companies don't like uncertainty, and if they start seeing that suddenly we may have a shutdown of our government, that could halt momentum, right when we need to build it up, he said at a town-hall style event in Pennsylvania.

The White House painted a bleak picture of the potential impact of a government shutdown, saying it could hurt recovery in the housing market and spark reactions ranging from the closure of national parks to the suspension of the weekend cherry blossom parade in the capital.

A senior administration official told reporters the processing of some tax refunds and audits, as well as small business loans would be halted, and operations of the Federal Housing Administration would be curbed.

Having the FHA not be able to guarantee loans during this period will have a significant impact if we shut down on the housing market, which is very fragile, the official said.

Both parties blamed each other for the political showdown, which will set the stage for more budget battles ahead and promises to echo through the 2012 election campaign.

Senate Democratic leader Harry Reid said the budget talks were constantly evolving and accused Republicans of changing the terms of the debate ahead of the midnight Friday deadline.

Every time we agree to meet in the middle they move where the middle is, Reid said. We stand here with fewer than 72 hours on the clock ... It's time to get the job done.

Boehner and Reid do not have a meeting scheduled, but their staffs are swapping proposals. Negotiators had tentatively agreed on a figure of $33 billion earlier this week, but Boehner is now pushing for a target of $40 billion.

(Additional reporting by Matt Spetalnick, Caren Bohan, Donna Smith, Thomas Ferraro, Patricia Zengerle, Tim Reid and David Morgan; Writing by John Whitesides; editing by Vicki Allen and Deborah Charles)

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