Following a closed-door party caucus, House Speaker John Boehner of Ohio (center), meets with reporters on Capitol Hill in Washington on Tuesday to challenge President Obama and the Senate to avoid the automatic spending cuts set to take effect in four days. [Photo/Agencies]

Positions hardened on Wednesday between United States President Barack Obama and Republican congressional leaders over the budget crisis even as they arranged to hold last-ditch talks to prevent harsh automatic spending cuts starting this week.

Looking resigned to the $85 billion in "sequestration" cuts starting on Friday, government agencies began reducing costs and spelling out to employees how furloughs will work.

Expectations were low that a White House meeting on Friday between Obama and congressional leaders, including Republican foes, would produce any deal to avoid the cuts.

Speaking to a business group, Obama said the cuts could shave 0.6 percentage points or more from already anemic growth and urged executives to pressure Congress into compromising on a broad deficit-reduction package.

"Whether that can be done in the next two days - I haven't seen things done in two days in Washington in quite some time," Obama told the Business Council, which is composed of chief executives of major US corporations. "The good news is that the public is beginning to pay attention to this."

Public services across the US - from air traffic control to food safety inspections and education - might be disrupted if the cuts go ahead.

Put into law in 2011 as part of an earlier fiscal crisis, sequestration is unloved by both parties because of the economic pain it will cause, but the politicians cannot agree how to stop it.

A deal in US Congress on less drastic spending cuts, perhaps with tax increases too, is needed by Friday to halt the sequestration reductions, which are split between social programs cherished by Democrats and defense spending championed by Republicans.

Obama stuck by his demand that Republicans accept tax increases in the form of eliminating tax loopholes enjoyed mostly by the wealthy as part of a balanced approach to avoiding sequestration.

"There is no alternative in the president's mind to balance," White House spokesman Jay Carney said.

Obama wants to end tax breaks for oil and gas companies and the lower "carried interest" tax rate enjoyed by hedge funds.

But Republicans, who reluctantly agreed to raise income tax rates on the rich to avert the "fiscal cliff" crisis in December, are in no mood for that.

"One thing US citizens simply will not accept is another tax increase to replace spending reductions we already agreed to," said Senate Republican leader Mitch McConnell.

In one of the first concrete effects of the cuts, the administration took the unusual step of freeing several hundred detained illegal immigrants because of the cost of holding them.

Friday's White House meeting will include McConnell and the other key congressional leaders: Senate Democratic leader Harry Reid, House of Representatives Democratic leader Nancy Pelosi, and House Speaker John Boehner, the top US Republican.

'Belated farce'?

The chances of success were not high.

One congressional Republican aide criticized the White House for calling the meeting for the day the cuts were coming into effect. "Either someone needs to buy the White House a calendar, or this is just a belated farce. They ought to at least pretend to try."

Unlike during other fiscal fights in Congress, the stock market is taking the sequestration impasse calmly.

US stocks rose, with major indices posting their best daily gains since early January, as Federal Reserve Chairman Ben Bernanke remained steadfast in supporting the Fed's stimulus policy and data pointed to economic improvement.

On Thursday, the Senate is expected to vote on competing Democratic and Republican ideas for replacing the sequestration. Both measures are expected to be defeated.

The Republican plan unveiled late on Wednesday would let the sequestration go into effect on Friday, but require Obama to submit an alternative $85 billion spending reduction plan to Congress by March 15, thus allowing more flexibility on how the cuts would be carried out.

Congress would have until March 22 to reject the proposal, in which case the original sequestration would remain in place. Democrats were still studying it. But on Tuesday, Senate Majority Leader Reid said new revenues needed to be part of any substitute plan.

The Democratic proposal would replace the across-the-board cuts mainly with tax increases on the rich coupled with spending cuts. Some of those would be achieved by eliminating crop subsidies for large agricultural companies.

Republicans have vowed to block any tax increases for deficit reduction.

Bernanke said sequestration was too drastic an approach for reducing the budget deficit.

"What I am advising is a more gradual approach. I'm not saying we should ignore the deficit. I am not saying we shouldn't deal with long-term fiscal issues, but I think that from the perspective of our recovery, a more gradual approach would be constructive," he said.