President Barack Obama held an urgent round of budget talks with U.S. congressional leaders on Wednesday evening to try to avert a government shutdown.

With the clock ticking toward a midnight Friday deadline, Obama met at the White House with Republican House of Representatives Speaker John Boehner, and Senate Majority Leader Harry Reid, a Democrat.

Republicans and Democrats have 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.

The two parties remain at odds over about $10 billion in spending cuts, according to a Democratic aide.

The final size of the cuts for the rest of this fiscal year will likely end up closer to the $33 billion Democrats have agreed on than the Republicans' $40 billion target, the aide said.

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 earlier.

A FAILURE OF LEADERSHIP

Boehner criticized Obama for a failure of leadership in the budget showdown and said the House on Thursday would consider a short-term bill to cut an additional $12 billion in spending and fund the government for another week while negotiations continued.

Obama and many of his fellow Democrats oppose another short-term extension. Some Republicans said it could serve as a legislative vehicle for a final budget deal.

That's not just bad policy, that's a fantasy, Reid said of the temporary extension. He said it would only put off the tough choices needed to reach a deal on the budget.

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.

The investment firm Goldman Sachs estimated a government shutdown lasting more than a week could cost the economy $8 billion in missed federal spending, dragging down growth.

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

Reid said the budget talks were constantly evolving and accused Republicans of changing the terms of the debate before the midnight Friday deadline.

'MOVING THE MIDDLE'

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.

Negotiators had tentatively agreed on a figure of $33 billion in spending cuts earlier this week, but Boehner is now pushing for a target of $40 billion.

The budget showdown is the biggest political test for both parties since Republicans swept to power in the House and made big Senate gains in last year's elections on promises to slash government spending and reduce the federal government.

Boehner is under pressure to push for deeper cuts from fiscal conservatives aligned with the Tea Party movement who oppose any compromise. Democrats said the Tea Party was the driving force in the showdown.

Boehner told ABC News in an interview that there was no daylight between him and the Tea Party. What they want is they want us to cut spending, he said.

A new Gallup poll showed that most Americans favored a compromise. Fifty-eight percent of those surveyed wanted government leaders who share their views to back a compromise. Just 33 percent said it would be better to hold out for a budget they agree with, even if that forced a shutdown.

(Additional reporting by Matt Spetalnick, Caren Bohan, Donna Smith, Thomas Ferraro, Patricia Zengerle, Tim Reid and David Morgan; Writing by Caren Bohan and John Whitesides; Editing by Paul Simao and Peter Cooney)

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