WASHINGTON (MarketWatch) — Talks between President Barack Obama and congressional leaders ended Thursday with no deal to raise the debt ceiling or cut spending, but a backup plan was emerging as a way to keep the government from defaulting early next month.

With time running short to strike a deal, Senate Democratic Leader Harry Reid and Senate Republican Leader Mitch McConnell were working on a plan to cut the deficit and stave off default, reports said.

Reuters reported following the talks Thursday that Obama had urged congressional leaders to “go back to their party members and gauge support for components of a debt and deficit deal,” adding that the president will address reporters Friday.

Obama said he wanted agreement on a path to a deal within the next 24 to 36 hours, several reports cited a Republican source as saying.

S&P warns again

A warning from Standard & Poor’s Ratings Services injected new urgency into the negotiations.

S&P said it had put U.S. sovereign ratings on formal credit watch and that, ”owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days.”

S&P had already lowered its outlook on the U.S. AAA long-term rating to negative in April, but since then “the political debate about the U.S. fiscal stance and the related issue of the U.S. government debt ceiling has, in our view, only become more entangled,” it said.

The U.S. Treasury said S&P’s latest warning “restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country’s obligations.”

S&P’s statement came one day after Moody’s Investors Service said it put the U.S. government’s Aaa bond rating on review for possible default because it fears “a small but rising risk” of a short-lived default.

Calls to action

Leaders of both parties issued fresh calls for action Thursday morning as they prepared for the talks at the White House. But Republicans and Democrats were still at odds, at least in public, over deficit-reduction goals and how to achieve them.

Before the Thursday meeting began, the White House said Republicans and Democrats agree on $1.5 trillion in spending cuts, and the Obama administration believes there are an extra $200 billion in cuts that everyone can agree to.

Tensions were still simmering Thursday after the previous day’s White House meeting reportedly ended with a testy exchange between House Republican Leader Eric Cantor of Virginia and Obama.

“House Majority Leader Eric Cantor has shown that he shouldn’t even be at the table,” Reid said on the Senate floor Thursday morning.

Cantor for the first time told Obama he would seek a smaller package of spending cuts and pass a short-term debt-limit extension, but Obama rejected the idea, report said.

Meanwhile, McConnell renewed a call for a balanced-budget amendment in remarks on the Senate floor, saying: “It’s time to change this debate altogether.”

The Obama administration is urging Congress to raise the debt ceiling by Aug. 2 or face default on obligations.

However, a back-up plan being worked on by Reid and McConnell would link a package of spending cuts to a plan McConnell unveiled earlier this week that would give the president the power to raise the debt limit through 2012 in three installments, reports said.

The plan would likely not include any tax increases, and has been endorsed by some congressional members on both sides though has also been denounced by some Republicans.

Many Republicans have insisted they’ll vote to raise the $14.3 trillion debt ceiling only if the size of the increase is matched by spending cuts and no tax increases. That has put them at odds with Obama and congressional Democrats, who say some tax increases are needed to help shrink deficits.

Both sides say they want to avoid default and pressure is intense on lawmakers and the White House to avoid it. However, some on the Republican side have questioned whether a default would in fact be catastrophic for the economy.

Many voices call for deal

China, the U.S. government’s biggest foreign creditor, also urged a resolution to the debt talks.

“We hope the U.S. government adopts responsible policies to protect the interests of investors,” said Chinese Foreign Ministry spokesman Hong Lei at a regular briefing. China held at least $1.152 trillion in Treasury securities as of April. Read more about worries in Asia over U.S. debt talks.

Fed Chairman Ben Bernanke warned Congress again Thursday to raise the debt ceiling as part of a “strong, credible” debt deal, with action coming “the sooner the better.”

Also Thursday, J.P. Morgan Chase & Co. JPM, +0.96% Chief Executive Jamie Dimon said: “No one can tell me with certainty a U.S. default wouldn’t cause catastrophe and wouldn’t severely damage the U.S. or global economy.”

As lawmakers and the White House haggle over a debt deal, the cost of insuring $10 million of U.S. debt against default for one year has climbed to $60,000 as of Thursday from $15,000 at the beginning of May, according to data provider Markit.

But the bond market has been little impacted, with yields on 10-year Treasurys remaining below 3%. Read Bond Report.

Speaking to the Senate Banking Committee, Bernanke also questioned an argument from some members of Congress that Treasury could prioritize payments and avoid a default on Treasurys if the debt ceiling is not raised.

“Whether default is on securities or on payments we owe to Medicare recipients, it is going to constitute a default of some type” and it will certainly have an impact on foreign investors’ confidence, the Fed chairman said.