Saying he was ready for "tough compromises," President Barack Obama began talks with congressional leaders Friday on a possible deficit-reduction deal that would prevent the country from going off the "fiscal cliff."
"My hope is that this is going to be the beginning of a fruitful process where we are able to come to an agreement that will reduce our deficit in a balanced way, that we will deal with some of these long-term impediments to growth, and we're also going to be focusing on making sure that middle class families are able to get ahead," Obama said, sitting next to Republican House Speaker John Boehner.
"Our challenge is to make sure that, you know, we are able to cooperate together, work together, find some common ground, make some tough compromises, build some consensus to do the people's business," he said.
The hour-long session was not expected to yield much in the way of tangible results, but it could create a template for the coming weeks of negotiations. And it began on a jovial note. Obama noted that the talks were being conducted a day before Boehner's birthday.
"We're not going to embarrass him with a cake, because we didn't know how many candles were needed," Obama said. Boehner is turning 63.
Stocks were lower as investors remained skeptical that the meeting would make progress.
Futures had indicated a higher open after The Wall Street Journal reported White House officials were in discussions that could indicate increased flexibility in negotiations with Republicans. (Read More: White House in Talks to Replace Sequester: Report.)
Still, caution remains, and the S&P 500 (^GSPC) is on track for its second-straight weekly decline of more than 1 percent.
Citing sources familiar with the matter, the Journal said officials were in advanced, internal talks to replace spending cuts set to begin in January with a separate package of spending cuts and tax increases. The White House had no comment on the report.
Investors worry that if no deal is reached on the large, automatic budget cuts and tax hikes set to begin next year, the economy could slip into recession.
"This is the first time we've had one iota of anything constructive being done,'' said Todd Schoenberger, managing principal at the BlackBay Group in New York. "That's very positive, but you can be flexible and still have us go over the cliff. Wall Street traders remain very nervous and need something concrete to get done.''
Nancy Pelosi, the top Democrat in the House of Representatives, said on Thursday she hopes the two sides can at least agree on the size of tax revenue and spending cuts that would be part of a bargain.
The meeting marks the first time Obama, a Democrat, will sit down with his Republican opposition since he won re-election last week.
All eyes will be on House Speaker Boehner, who will have to balance the wishes of a newly confident president with the demands of his rank-and-file conservatives.
Senate Democratic Leader Harry Reid and Mitch McConnell, his Republican counterpart, also attended.
Both sides are pledging cooperation even as they dig in on their long-held opening positions, and are eager to reassure nervous investors that they will reach a deal.
"Going over the fiscal cliff, in my view, is a bucket of crazy,'' Republican Representative Peter Roskam, one of Boehner's deputies, said at a budget conference.
Obama insists that tax rates on the wealthiest 2 percent of Americans must rise, while Republicans pledge that they will not agree to any rate increase.
There could be room for compromise.
Obama could agree to allow the top tax rate to rise to something less than the 39.6 percent he wants, from the current 35 percent.
Policymakers, for example, could also agree to limit the tax increase to households making more than $500,000 annually, rather than the $250,000 cap Obama is demanding.
Republicans have suggested generating more revenue by limiting tax breaks for the wealthiest, rather than raising their rates.
Obama has said that would not raise enough money.
The negotiators also need to confront $109 billion in domestic and military spending cuts due to kick in on Jan. 2, the result of earlier failures to craft a more nuanced budget deal.
A senior Democratic Senate aide said it should be relatively easy to head off the cuts, known as ``sequestration,'' if the two sides can get past the tax issue.
"The hard part is the tax cuts,'' the aide said. "Neither side wants sequestration to take place and that should be easy to solve in a balanced plan that has revenues.''
Nonpartisan budget forecasters say failure to reach a deal could push the U.S. economy back into recession and drive up the unemployment rate.
Business leaders say the uncertainty is already weighing on the economy as employers postpone hiring and capital expenditures until they get a better sense of the tax and spending environment.
The S&P 500 has dropped 4.3 percent over the past two weeks, in part due to concerns over the fiscal cliff. Major U.S. stock indexes were down by about one-third of a percent on Friday.
The two sides could also agree to a temporary deal that would get them past the cliff and give them more time to work out a more lasting solution.
White House economic adviser Gene Sperling said the Obama administration is not interested in a solution that simply extends current provisions into next year.
"Compromise cannot be a dirty word if we want to move our country forward,'' Sperling said at a budget conference.
Lawmakers hope to revamp the U.S. tax code and retool expensive entitlement programs like Medicare, the government health insurance program for the elderly and disabled.
-Reuters and AP contributed to this report.
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