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Photo: The Canadian Press. All rights reserved.

Senate Majority Leader Harry Reid, D-Nev., walks to a closed-door meeting with fellow Democrats as he and Senate Minority Leader Mitch McConnell, R-Ky., work to negotiate a legislative path to avoid the so-called "fiscal cliff," at the Capitol in Washington, Sunday, Dec. 30, 2012. Senate and House leaders are rushing to assemble a last-ditch agreement to stave off middle-class tax increases and possibly delay steep spending cuts in an urgent attempt to find common ground after weeks of gridlock. (AP Photo/J. Scott Applewhite)

Working against a midnight deadline, negotiators for the White House and congressional Republicans narrowed their differences Monday on legislation to avert across-the-board tax increases.

Congressional officials familiar with talks between Vice-President Joe Biden and Senate Republican leader Mitch McConnell said one major remaining sticking point was whether to postpone spending cuts that are scheduled to begin on Jan 1.

Republicans want to replace across-the-board reductions with targeted cuts elsewhere in the budget, and the White House and Democrats were resisting.

At the same time, Democrats said the two sides were closing in on an agreement over taxes. They said the White House had proposed blocking an increase for most Americans, while letting rates rise for individuals with incomes of $400,000 a year and $450,000 for couples, a concession from President Barack Obama's campaign call to set the levels at $200,000 and $250,000.

Any overall deal was also likely to include a provision to prevent a spike in milk prices with the new year, extend unemployment benefits due to expire and protect doctors who treat Medicare patients from a 27 per cent cut in fees.

Both the House and Senate were on track to meet on the final day of the year, although there was no expectation that a compromise could be approved by both houses by midnight, even if one were agreed to.

Instead, the hope of the White House and lawmakers was to seal an agreement, enact it and send it to Obama for his signature before taxpayers felt the impact of higher income taxes or federal agencies began issuing furloughs or taking other steps required by spending cuts.

Regardless of the fate of the negotiations, it appeared all workers would experience a cut in their-home pay with the expiration of a two-year cut in payroll taxes.

Officials who described the negotiations did so on condition of anonymity, citing the confidential nature of the discussions.

A spokesman for McConnell, Don Stewart, said the Kentucky lawmaker and Biden "continued their discussion late into the evening and will continue to work toward a solution." Underscoring the flurry of activity, another GOP aide said the two men had conversations at 12:45 a.m. and 6:30 a.m. Monday.

Unless an agreement is reached and approved by Congress by the start of New Year's Day, more than $500 billion in 2013 tax increases will begin to take effect and $109 billion will be carved from defence and domestic programs

Though the tax hikes and budget cuts would be felt gradually, economists warn that if allowed to fully take hold, their combined impact ”the so-called fiscal cliff” would rekindle a recession.

"This whole thing is a national embarrassment," Sen. Bob Corker, R-Tenn., said Monday on MSNBC, adding that any solution Congress would swallow at this late stage would be inconsequential. "We still haven't moved any closer to solving our nation's problems."

In a move that was sure to irritate Republicans, Reid was planning absent a deal to force a Senate vote Monday on Obama's campaign-season proposal to continue expiring tax cuts for all but those with income exceeding $200,000 for individuals and $250,000 for couples.

In one sign of movement on Sunday, Republicans dropped a demand to slow the growth of Social Security and other benefits by changing how those payments are increased each year to allow for inflation.

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Eds: Associated Press writers David Espo, Julie Pace, Robert Burns and Josh Lederman contributed to this report.