By Kim Dixon, Rachelle Younglai and David Lawder
WASHINGTON (Reuters) - Republicans in the House of Representatives backed away on Friday from a fiscal clash with President Barack Obama next month that could have risked a government default and chaos in financial markets, shifting to a new, less aggressive stance.
Top Republican leaders, meeting in Williamsburg, Virginia, said they were prepared to allow the U.S. government to borrow enough money to keep it fully operating for the next three months without demanding immediate spending cuts from Obama.
Instead, the Republicans, who control the House, will require as part of the legislation raising the debt ceiling that the Democratic-led Senate pass a budget plan by April 15.
If the Senate fails to act, they said, members of Congress would not get paid. How that might work in practice, in light of existing budget law and constitutional restrictions on changing congressional salaries in the middle of a term, was unclear. House Republicans hope to pass the legislation next week.
Republican leaders, including House Speaker John Boehner and Majority Leader Eric Cantor, made the announcement after an annual retreat at a resort in Williamsburg, where members listened to pollsters describe the party's decline in standing among American voters.
It followed a humiliating defeat in the "fiscal cliff" battle that ended on New Year's Day with Obama getting tax increases he sought on the wealthy without committing to significant budget cuts Republicans were seeking in return.
World equity and oil prices rebounded after the statement by the Republican leaders.
The announcement marked a major climbdown for Republicans, who have seen the debt ceiling as their strongest point of leverage in Washington's partisan spending wars, despite the consternation it caused the White House, global financial markets and public opinion.
The White House on Friday welcomed the three-month extension plan as long as it was not conditioned on spending cuts. Obama has argued that negotiations on spending cuts should be part of larger deficit reduction talks, and not be tied to the debt ceiling.
"We are encouraged that there are signs that Congressional Republicans may back off their insistence on holding our economy hostage to extract drastic cuts in Medicare, education and programs middle class families depend on," White House spokesman Jay Carney said in a statement.
Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid, also said the Republican approach was reassuring.
"If the House can pass a clean debt ceiling increase to avoid default and allow the United States to meet its existing obligations, we will be happy to consider it," he said in a statement.
A spokesman for House Democratic leader Nancy Pelosi was less receptive. "This proposal does not relieve the uncertainty faced by small businesses, the markets and the middle class. This is a gimmick unworthy of the challenges we face and the national debate," Drew Hammill said.
The details on the new Republican approach appeared less pressing to party leaders than defusing the politically and economically explosive debt ceiling battle that was expected in late February and early March.
The Treasury needs congressional authorization to raise the current $16.4 trillion U.S. debt limit sometime between mid-February and early March. How long a debt ceiling lasts - a few months or a few years - depends on the amount of borrowing authorized.
Republicans had promised to use the occasion to demand deep spending cuts from Obama and his Democrats, and some had said they were willing to push the government to the brink of default if their demands were not met.
That sort of rhetoric all but vanished on Friday.
"Next week, we will authorize a three month temporary debt limit increase to give the Senate and House time to pass a budget," Cantor said in a statement.
"Furthermore, if the Senate or House fails to pass a budget in that time, Members of Congress will not be paid by the American people for failing to do their job. No budget, no pay."
The statement made no mention of the 27th Amendment to the U.S. Constitution, which says that no law "varying the compensation" of members of Congress shall take effect until after an intervening congressional election.
The plan aims to draw the Senate into action to shrink deficits. The Senate has failed to pass a formal budget resolution in nearly four years, and it has taken no action on House-passed Republican budgets.
Mitch McConnell of Kentucky, the Senate's Republican minority leader, said in a statement he welcomed the pressure on his Democratic counterparts who had "prevented this body from performing its most basic of duties: passing a federal budget."
A key theme to emerge at the Williamsburg conference was a willingness to pursue more incremental steps on deficit reduction. Rather than one massive deal, each fiscal deadline would represent an opportunity to find savings.
After the deadline for a debt ceiling increase, Congress faces a March 1 deadline to avert automatic spending cuts, and the March 27 expiration of funding for government agencies and programs. A three-month debt limit extension would add a further deadline in April or May.
Representative Mick Mulvaney of South Carolina, one of the House's most conservative budget hawks, said he had concluded that smaller steps were the best path forward in dealing with the immediate fiscal crisis.
Instead of passing regular budgets to try to reduce spending, Congress has relied largely on stop-gap spending measures, known as continuing resolutions, to keep the government running.
Senate leaders have said there was no need to pass a budget for the past two fiscal years because the last major budget deal in 2011 set spending levels that were more legally enforceable.
A House Republican leadership aide said it was not anticipated the three-month debt limit legislation would include spending cuts.
Although Boehner previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.
(Editing by Fred Barbash and Peter Cooney)