THE White House and Republicans have struck a last minute deal to avert a fiscal cliff that threatened to send the US into recession.

The White House and top Republicans have struck a last minute deal to avert huge New Year tax hikes and spending cuts known as the "fiscal cliff"' that had threatened to send the US economy into recession.

The pact, if agreed by Congress, would hand President Barack Obama a victory by hiking tax rates on the wealthy - those earning over $450,000 a year - but exempt everyone else who had been due to see their taxes go up on January 1.

It would also put off $109 billion in budget cuts across the government for two months, but would in the process line up another showdown between Obama's Democrats and Republicans in dysfunctional Washington at the end of February.

Vice President Joe Biden, who negotiated the deal with the top Republican in the Senate Mitch McConnell, was on Capitol Hill to sell it to Democratic senators, some of whom wanted tax hikes to kick in at a lower threshold.

Had no deal been struck, budget experts warned that the fragile US economy could have been sent spinning back into recession by the $500 billion combined whack from spending cuts and tax hikes.

In the end, the deal was clinched just a few hours before a midnight deadline.

A Senate vote was possible overnight, while the House of Representatives was not due back into session until Tuesday.

World stock markets, expected to be thrown into turmoil by a failure to beat the deadline, are closed for New Year's Day, so lawmakers have a few extra hours of breathing room to get the deal concluded.

The deal means a return to Bill Clinton-era tax rates for top earners to 39.6 percent, starting for those who make $450,000 a year and above.

Obama had originally campaigned for tax hikes to kick in for those making $250,000 and above.

The president said earlier that the deal would extend tax credits for clean energy firms and also unemployment insurance for two million people that had been due to expire.

It was also expected to include an end to a temporary two percent cut to payroll taxes for Social Security retirement savings and Medicare health care programs for seniors and changes to inheritance and investment taxes.

A source familiar with the deal said that the two-month delay to spending cuts - known as the sequester - was financed by increased revenues and spending cuts from defense and non-defense spending.

Both Democratic House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid had signed off on the deal, the source said.

Now it remains for Republican House Speaker John Boehner to rally his restive and difficult to control conservative coalition around the agreement.

Earlier, on a day of drama and brinkmanship, Obama had angered Republicans in remarks in which he warned that he was not done with seeking higher taxes on the rich to pay down the US budget deficit.

"Now, if Republicans think that I will finish the job of deficit reduction through spending cuts alone... then they've another thing coming," Obama said, while poking fun at the glacial pace of Congressional deliberations.

Republicans immediately took to the floor of the Senate to complain.

Senator John McCain accused Obama of ridiculing Republicans and of needlessly antagonizing House members required to vote for the deal.

Republican Senator Bob Corker said his heart was pounding with disappointment at Obama's remarks.

"I know the president has fun heckling Congress. I think he lost probably numbers of votes with what he did," he said.

"It's unfortunate he doesn't spend as much time solving problems as he does with campaigns and pep rallies."

Signs that a deal could be close cheered investors as US markets rose before closing for the year. The Dow Jones Industrial Average closed up 166.03 points (1.28 percent) at 13,104.14.

Both sides were already gearing up for the next legislative showdown over the need to lift the government's statutory borrowing limit of $16.4 trillion, which was reached Monday.

The Treasury will now take extraordinary measures to keep the government afloat for an undisclosed period of time until the ceiling is raised. Republicans are already demanding spending cuts in return.

"I think there is going to be a pretty big showdown next time when we go to the debt limit," McCain told CNN.

Highlights include:

• Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
• Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
• Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
• Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
• Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, earned income tax credit, and an up to $2,500 tax credit for college tuition. Also extends for one year accelerated "bonus" depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
• Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
• Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
• Social Security payroll tax cut: Allows a 2 percentage point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.
• Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.

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