The White House and top Republicans struck a dramatic deal to avert huge New Year tax hikes and postpone automatic spending cuts that had threatened to send the US economy into recession.

After months of agonizing over the crisis, weeks of debate about a possible solution, and days of intense, closed-door negotiations, members of the US Senate voted overwhelmingly 89-8 at around 2 am on Tuesday to pass a controversial bill that averts the so-called "fiscal cliff."

It now goes to the House of Representatives, which was expected to hold a vote on the measure late on New Year's Day. US President Barack Obama in a statement urged the House to pass it without delay.

If the measure is agreed by both chambers of Congress, it would hand Obama a victory by hiking tax rates on households earning more than $450,000 a year, but exempt everyone else from a planned tax increase.

"While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country, and the House should pass it without delay," Obama said in his statement after the Senate voted overwhelmingly to approve the legislation.

The bipartisan deal - hammered out between Vice-President Joe Biden and Senate Minority Leader Mitch McConnell, could still face stiff challenges in the House, which was convening to vote on the legislation late on Tuesday.

Critics complain the measure did little to rein in huge annual budget deficits that have helped push the US debt to $16.4 trillion.

The agreement came too late for Congress to meet its own deadline of New Year's Eve for passing laws to halt $600 billion in tax hikes and spending cuts which strictly speaking came into force on Tuesday.

But with the New Year's Day holiday, there was no real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures.

Backing in the House will depend on Republicans, who control the chamber, but many complain that Obama has shown little interest in cutting government spending and is too concerned with raising taxes.

Obama said: "There's more work to do to reduce our deficits, and I'm willing to do it.

"But tonight's agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans."

Members were thankful that financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff.

But if lawmakers cannot pass legislation in the coming days, markets are likely to turn sour. The US economy, still recovering from the 2008-09 downturn, could stall again if Congress fails to fix the budget mess.

"If we do nothing, the threat of a recession is very real. Passing this agreement does not mean negotiations halt, far from it. We can all agree there is more work to be done," Majority Leader Harry Reid, a Democrat, told the Senate floor.

A new, informal deadline for Congress to legislate is now Wednesday, when the current body expires and it is replaced by a new Congress chosen at last November's election.

The Senate bill, worked out after long negotiations on New Year's Eve between Biden and McConnell, also postpones for two months a $109-billion sweeping spending cut on military and domestic programs.

It extends unemployment insurance to 2 million people for a year and makes permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.

The tax hikes do not sit easy with Republicans but conservative senators held their noses and voted to raise rates for the rich because not to do so would have meant increases for almost all working Americans.

"It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort," McConnell said.

House Speaker John Boehner - the top Republican in Congress - said the House would consider the Senate deal. But he left open the possibility of the House amending the Senate bill, which would spark another round of legislating.

Boehner has struggled for two years to get control over a group of several dozen Tea Party fiscal conservatives in his caucus who strongly oppose tax increases and demand that he force Obama to make savings in the Medicare and Social Security healthcare and retirement programs.