(MarketWatch) — The Senate voted Friday night to set aside a House-passed bill that would raise the U.S. debt limit and cut the deficit, paving the way for a vote on Senate Democrats’ own measure and intense compromise talks as the clock ticked toward a potential government default next week.

The House bill passed 218-210 earlier Friday, after Republican leaders won over conservatives by tying an increase in the $14.3 trillion debt limit to passing a balanced-budget amendment. President Barack Obama opposes the House bill and is backing the rival measure from Senate Democratic Leader Harry Reid.
The House and Senate bills share key similarities, but a sticking point is how much and when to raise the government’s borrowing limit.
Senate leaders were working furiously on a compromise measure, and comments from Republicans including Sens. Olympia Snowe of Maine and Scott Brown of Massachusetts indicated a deal could win bipartisan support. Snowe said she was reviewing plans by Reid, of Nevada, and Minority Leader Mitch McConnell of Kentucky and hoped they would work through their differences, according to The Wall Street Journal.
Obama continued to warn that the debt limit needs to be raised by Tuesday to avoid default. Payments on Treasury debt, veterans’ benefits and government employees’ salaries would halt if the government can’t pay its bills, the White House says.
On Saturday, the Republican-controlled House plans to reject Sen. Reid’s debt-ceiling bill, which would cut around $2 trillion in spending over 10 years and raise the debt limit by about $2.4 trillion. That’s enough to last past the 2012 elections and avoid a new fight over the debt ceiling before voters go to the polls.
Reid is hoping to ultimately pass his bill in the Senate after negotiating with Republicans and has set a vote to cut off debate on it for early Sunday morning. Final passage would then come Tuesday.
The House bill rejected by the Senate Friday night would lift the debt ceiling by $900 billion immediately. Authored by Speaker John Boehner, it requires both the House and Senate to pass a balanced-budget amendment before the debt limit is raised again. Boehner’s bill, which faced a revolt from conservatives on Thursday night, also cuts $917 billion in spending over 10 years.
“We’ve tried our level best” to end this crisis, Boehner, an Ohio Republican, said on the House floor Friday afternoon.
The Senate voted to table, or set aside, the House Republican bill in a vote of 59-41 on Friday night.
Earlier Friday, Reid invited McConnell to “sit down with me” and work out a deal to raise the borrowing limit and cut spending.
“This is our last chance to save this nation from default,” Reid said.
Neither the House nor the Senate bill would raise taxes.

Investors are nervously watching the action in Washington. U.S. stocks extended a multisession losing streak Friday, sending the Dow Jones Industrial Average   and the S&P 500 Index to their worst weeks in more than a year. Fears that U.S. lawmakers wouldn’t resolve the debt crisis threatening an already cooling U.S. economy were behind the selling.

Treasury prices, meanwhile, gained on Friday and pushed 10-year note yields down by the most since December.

Boehner’s original plan faced defections from conservative Republicans upset that it didn’t make deeper spending cuts. The Ohio Republican spent much of this week trying to marshal support for his proposal, only to push back a floor vote originally scheduled for Thursday night. The addition of the balanced-budget amendment — something Obama has said he opposes — persuaded conservatives to get on board.
The Treasury has long insisted that Tuesday is a hard deadline for raising the limit. But according to The Wall Street Journal, the Treasury is planning to prioritize its payments by ensuring that it will make a $29 billion interest payment to bond holders on Aug. 15.
Credit-rating firms including Standard & Poor’s have warned that the United States could lose its coveted AAA rating without a credible plan to slash deficits. Obama invoked those warnings on Friday, saying the cost of borrowing would rise for all Americans.
“A lower credit rating would result potentially in a tax increase on everyone in the form of higher interest rates on their mortgages, their car loans, their credit cards. And that’s inexcusable,” the president said.
Tea-party groups, for their part, were holding out for deep spending cuts.
“Like any family or any business facing fiscal difficulties, Washington must make cuts in spending and must make them now — today. We simply will not accept their lazy, fiscally irresponsible approach,” said a statement from Jenny Beth Martin and Mark Meckler, co-founders of the Tea Party Patriots.