By Richard Cowan and Caren Bohan
WASHINGTON (Reuters) - Signs of progress began to emerge in U.S. budget talks on Tuesday as top Senate Democratic negotiator Patty Murray said she sees a path toward an agreement to ease automatic spending cuts known as the "sequester."
Murray, asked if there was a path forward in her talks with her counterpart, Republican Representative Paul Ryan, said: "I believe there is."
The lawmakers are racing against a December 13 deadline for a deal, as Republican resistance to including new tax revenues continued to be a sticking point, according to a senator on the negotiating committee headed by Murray and Ryan.
On January 15, funds for many government activities will be exhausted. Without a budget deal by then, another government shutdown could occur.
Senator Murray, chairwoman of the Senate Budget Committee, did not elaborate on possible consensus in the talks but said the two were working toward a small deal.
Her comments echoed positive sentiments expressed by some Republican and Democratic aides, and by a fellow member of the budget-negotiating panel, Senator Angus King, an independent who votes with the Democrats.
King told reporters it was his impression the regular meetings between Ryan, chairman of the House Budget Committee, and Murray were yielding progress in the talks. But he added, "My understanding is there are major issues outstanding, the principal one being revenues."
Murray and other Democrats on the 29-member budget panel are seeking revenues from the closure of tax breaks for the wealthy and large corporations to replace part of the sequester cuts, which are due take a $91 billion bite out of funding for government agencies and discretionary programs next year.
Republicans have refused to consider such tax hikes and want to pay for any easing of the sequester with spending cuts on federal benefits programs.
The next round of across-the-board spending cuts known as "sequestration" are set to begin January 15, the same date that federal government funding expires again.
A spokesman for Ryan, of Wisconsin, declined to comment on the talks.
But Ryan, speaking at a Wall Street Journal forum, said he was comfortable predicting there would not be another government shutdown on January 15 because either he and Murray would reach a deal or funding would be extended at levels reduced by the sequester cuts.
"Either one of those two scenarios will prevail and we will not have another shutdown," he said.
He said he did not expect similar "theatrics" over the next debt-limit deadline in February because Republicans would shift away from trying to use it to stop "Obamacare" health reforms.
Ryan and Murray have been in contact daily since the negotiating panel's second public meeting last week, a senior Democratic aide said. "They wouldn't be having these continued conversations and they wouldn't be continuing to work if they didn't see some path to a deal," the aide said.
A House Republican aide also said Ryan had told some lawmakers in private conversations that he was close to a deal with Murray. But the aide did not provide any details.
The positive sentiments also came as Senator Mitch McConnell, the top Senate Republican, on Tuesday urged House Republicans to stand together in favor of keeping the sequester cuts in place with a $967 billion discretionary spending level for fiscal 2014 that began October 1.
Many Republicans have said that if the budget talks fail, they would simply keep this spending level in place, even if it means accepting bigger cuts to military spending. This would be preferable to any new revenues, they say.
But the party is beginning to splinter over the sequester cuts, indicating that there may not be enough Republican votes to approve the lower spending level of $967 billion. Democrats want to return to the pre-sequester level of $1.058 trillion for the current fiscal year.
It might be too difficult to pass a budget at the $967 billion level, creating an incentive for alternative deal.
The messy rollout of President Barack Obama's signature health care law offers another incentive for Republicans to cut a deal, said Jim Manley, a former aide to Democratic Senate Majority Leader Harry Reid.
"They want to focus, to the extent that they can, on Obamacare and not get sidetracked by budget debacles," said Manley, who noted the problems with the healthcare laws are creating political problems for Obama and Democrats.
McConnell's pitch in a closed-door meeting met resistance from some House Republicans, including Representative Scott Rigell, whose Virginia district is home to many naval installations in the Norfolk area that would suffer big cuts.
"Congressman Rigell did speak with the senator to make clear his views that the combination of sequester and continuing resolutions are damaging our military," said Rigell spokeswoman Kim Mosser Knapp.
And just hours after McConnell spoke to House Republicans, some of his own Senate Republicans also expressed their opposition to the scheduled spending cuts.
Five Senate Republicans joined 28 Democratic senators in a letter to Senate Budget Committee leaders urging robust funding for National Institutes of Health medical research. The first round of automatic spending cuts, which went into effect early this year, cut NIH funding by $1.55 billion, resulting in 640 fewer research projects being awarded, the 33 senators said.
(Additional reporting and writing by David Lawder; Editing by Doina Chiacu)