WRAPUP 5-Senate leaders to make last-ditch 'fiscal cliff' effort

* Obama says he's "modestly optimistic"

* U.S. stocks indexes drop 1 percent

WASHINGTON, Dec 28 (Reuters) - President Barack Obama and

congressional leaders agreed on Friday to make a final effort to

prevent the United States from going over the "fiscal cliff,"

setting off intense bargaining over Americans' tax rates as a

New Year deadline looms.

The focus now turns to the Senate, where Harry Reid, the

Democratic majority leader, and Mitch McConnell, who heads the

Republican minority, will try to come up with a deal that can

then be approved in the Republican-controlled House of

Representatives before the end of the year.

Obama said he was "modestly optimistic" that an agreement

could be found that would prevent taxes going up for almost all

working Americans.

If things cannot be worked out in the Senate, Obama said he

wanted both chambers in Congress to vote on a plan of his that

would increase taxes only for households earning more than

$250,000 a year.

The plan would also extend unemployment insurance for about

2 million Americans and set up a framework for a larger deficit

reduction deal next year.

"The hour for immediate action is here. It is now. We're now

at the point where in just four days, every American's tax rates

are scheduled to go up by law. Every American's paycheck will

get considerably smaller. And that would be the wrong thing to

do," Obama told reporters.

He was speaking after an hour-long meeting in the White

House with the two Senate leaders plus their counterparts in the

House, Republican Speaker John Boehner and Democratic Minority

Leader Nancy Pelosi.

A total of $600 billion in tax hikes and cuts to government

spending will start kicking in on Tuesday if politicians cannot

reach a deal, which could push the U.S. economy into a

recession.

To prevent that, the two Senate leaders will plunge into

talks on Saturday that will focus mainly on the threshold for

raising income taxes on households with upper-level earnings.

They will also discuss whether the estate tax should be kept

at current low levels or allowed to rise, a Democratic aide

said.

The chances of success were unclear. Earlier talks between

Obama and Boehner collapsed last week when several dozen

anti-tax Republicans defied their leader and rejected a plan to

raise rates for those earning $1 million and above.

The Democratic aide said Boehner stuck mainly to "talking

points" in Friday's White House meeting, with the message that

the House had acted on the budget and it was now time for the

Senate to move. A core of fiscal conservatives in Boehner's

caucus opposes any tax hikes at all, and House Republicans also

want to see Obama commit to major spending cuts.

Pessimism about the fiscal cliff helped push U.S. stocks

down on Friday for a fifth straight day. The Dow Jones

industrial average dropped 158.20 points, or 1.21 percent.

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