Global economies are intently watching the fight between Republicans and Democrats over the U.S. debt and related demands for spending cuts. Failure to raise the debt limit could lead to the first-ever default for the United States and higher interest rates that would be harmful to its fragile recovery.

Treasury Secretary Timothy Geithner is preparing special funding maneuvers to avoid default and delay the hard deadline to Aug. 2.

For now, Wall Street is betting on a deal, although analysts told Reuters that lawmakers may not reach an agreement until the 11th hour.

What is becoming increasingly clear is that a May agreement is highly unlikely. July is shaping up as the best window of opportunity for Congress to increase the debt limit to keep the government credit card valid through the November 2012 U.S. elections.

"We're no longer looking to settle it this work period," a Senate Democratic aide told Reuters. The Senate's current work period is scheduled to end May 27, when it breaks for weeklong Memorial Day holiday.

That would mean work on a debt limit and deficit-reduction deal resumes in June with detailed negotiations likely on the size of spending cuts in the fiscal year starting Oct. 1 and whether any tax increases should be included.

Gary Pollack, head of fixed-income trading at a Deutsche Bank Private Wealth Management group in New York, said the Treasury Department could even employ additional steps, pushing back to later in August for when a default could occur without congressional action.

But with Congress aiming to be on vacation all but the first week of August, lawmakers are unlikely to leave the debt limit fight hanging well into that month.

DON'T COUNT VOTES YET

For now, Congress and Obama have plenty of work ahead. "I don't think we're even close to agreeing on a starting point for a proposal much less trying to count votes for it," said a House Republican leadership aide.

Conservative Republicans, especially Tea Party activists, are holding out for steep domestic spending cuts while liberal Democrats want to make the rich share some of the burden of reducing a deficit projected at $1.4 trillion just this year.

Senate Budget Committee Chairman Kent Conrad told reporters that a short debt limit increase — "something to carry toward the end of the year" — might be necessary to give even more time to work out a long-term deficit-reduction plan.

In a speech in New York, House Speaker John Boehner said that spending cuts must exceed the amount of new borrowing authority, which could be $2 trillion.

Last week, Boehner suggested Congress may not want to wait until late July or even early August to pass debt limit legislation. "Why wait?" Boehner asked.

But there appeared to be disagreement among Republicans on the timing of a vote and how long to stretch out the debate in order to extract deficit-reduction concessions from Democrats.

"The bottom line is that Republicans are looking to support a proposal that significantly cuts spending," the Republican aide said. "Whether that happens next week or the last week of July, that's what we're looking to advance."

Vice President Joe Biden last week kicked off a series of negotiations with leading Democrats and Republicans in Congress over how to win short-term spending cuts and set in motion procedures for longer-term deficit reduction — the Republican prerequisites for supporting a debt limit increase.

The next Biden group meeting is set for Tuesday. Democratic Representative James Clyburn, one of the members, has said he hoped that would be the time to "get down to nuts and bolts."

A senior Senate Democrat Monday warned that global financial markets needed "plenty of breathing room" between enactment of a debt limit increase and the default deadline.

"It should not be an hour or a day or even a week before we are about to default," said Democratic Senator Charles Schumer. "If nothing is happening by July 15 or so, markets are going to get really, really worried."

James Newman of the New York investment bank Keefe, Bruyette and Woods, said, "I think there is a general optimism out there that they are going to get something done but my guess is that it will go down to the 11th hour."