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By Alister Bull

WASHINGTON (Reuters) - A deal to lift the debt limit may hinge on negotiations led by Vice President Joe Biden, which still have a long way to go to close the gap between deeply divided Democrats and Republicans.

Biden has increasingly been playing the role of emissary for the White House to Capitol Hill on the budget battle that threatens to lead the United States to the verge of default.

Republicans are demanding deep spending cuts in return for raising the $14.3 trillion borrowing ceiling, which needs to happen by early August.

Biden will gather together senior lawmakers from both parties on Tuesday afternoon for a third set of talks to hammer out a compromise on reducing budget deficits.

The vice president's group made a better start than most observers had expected when it began to meet this month. But few expect an agreement to come quickly or easily.

"It is a virtual certainty that this process will go to the absolute last minute, and then for five minutes longer," said Alex Brill, a research fellow at the American Enterprise Institute who worked in President George W Bush's White House.

Attention has shifted to the Biden group after talks among a separate negotiating panel -- the "Gang of Six" senators -- stalled last week with the departure of Republican Senator Tom Coburn, a fiscal conservative from Oklahoma.

Some analysts saw the breakdown of the Gang of Six talks as a bleak harbinger for the prospect of a long-term budget deal.

That group, comprised of fiscal experts from both parties, had been working behind the scenes since early this year.

Biden's panel includes four Democratic lawmakers and two Republicans who are known more for the clout they wield within their parties than for their budgetary expertise.

Among the members are Eric Cantor, the No. 2 Republican in the House of Representatives and James Clyburn, the No. 3 House Democrat.

Biden has been a point person within the administration for relationships on Capitol Hill because of the 36 years he spent as a Delaware senator.

ELECTION ISSUE

The budget debate already looms over the 2012 election.

President Barack Obama, a Democrat, wants to shield programs cherished by his party like Medicare, and wants wealthier Americans to pay more in taxes to help control the deficit.

Republicans vow to fight higher taxes and want to curb the spiraling U.S. debt by shrinking government spending.

The United States reached the congressionally mandated limit on its borrowing on May 16. Administration officials are using special accounting measures to avoid a default for now but they warn their leeway to do that will run out on August 2.

Many think a deal will ultimately be reached.

But they also see a risk of a bargaining miscalculation by one side or the other that scuppers discussions and pushes the country toward default.

"The whole situation is very prone to accident and you could see bad things happen due to misjudgment," said Rudolph Penner, a former Congressional Budget Office chief now at the Urban Institute in Washington.

The battle over the debt and deficits is being fought along hard ideological lines.

That said, Biden's group has made some progress by focusing on areas like farm subsidies that both parties have targeted for reduction before taking on divisive areas like taxes and health care.

One participant, Republican Senator Jon Kyl, says the seven-member panel has so far identified about $150 billion in savings. That still falls far short of what is needed.

House of Representatives Speaker John Boehner, the top Republican in Congress, says cuts must exceed any increase in the debt ceiling, setting a high bar for his support.

The U.S. Treasury sees a $2 trillion increase in the debt ceiling needed to last through the November 2012 elections.

In any case, Biden's talks are now the only visible discussions still taking place in Washington to craft steps to cut the deficit and win enough votes to lift the debt limit.

On Thursday, the Democratic-led U.S. Senate put its annual budget process on hold to allow the Biden talks to take the lead in seeking a compromise.

Secret discussions could also be underway between the administration and lawmakers, as happened last year when Obama struck a compromise over extending Bush-era tax cuts.

But the White House said on Friday that Biden's group was now the main vehicle for reaching a deal on the debt limit.

"I hope that they are successful, because at the moment there is no other game in town," said Bill Frenzel, a scholar at the Brookings Institution in Washington.

(Editing by Caren Bohan and Laura MacInnis)

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