The first face-to-face talks between President Barack Obama andcongressional leaders failed to break the budget logjam as apartial U.S. government shutdown entered its third day.

The Oval Office meeting yesterday evening ended with both sidesreiterating their positions and the points they've been making fordays, raising the prospect of a prolonged standoff over thegovernment shutdown and raising the U.S. debt limit.

Democrats, including Obama, say Republicans must end theshutdown and raise the debt ceiling as a precondition to talks onbroader budgetary disputes. Republicans want to use the fiscaldeadlines to extract changes to Obama's health-care law.

“They will not negotiate,” House Speaker John Boehner, an OhioRepublican, said after the hour-long meeting with Obama and othercongressional leaders. “We had a nice conversation, a politeconversation, but at some point we've got to allow the process ourfounders gave us to work out.”

Neither side budged yesterday. The first government shutdownsince 1996 and the debt-limit debate continued to merge into amessy month of standoffs.

House Republicans plan to advance a debt-limit bill while thegovernment is shuttered, resurrecting an approach that included along list of party priorities, according to a Republican lawmakerand two leadership aides who asked for anonymity to discuss thestrategy.

Democrats, including Obama, said Boehner should just allow avote on funding the government and rely on support from Democratsand a group of House Republicans willing to accept a fundingextension through Nov. 15 at the spending levels Republicansprefer.

“The moderates need to muscle up here,” Senator ClaireMcCaskill, a Missouri Democrat, said on MSNBC today. “Boehnerreally needs to show some courage” in the face of Republicans“afraid of someone running against them from the right.”

U.S. stocks retreated for a second day and Treasuries fell asthe partial shutdown entered a third day. The Standard & Poor's500 Index fell 0.3 percent at 9:38 a.m. in New York, and 10-yearTreasury yields rose 1.4 basis points to 2.63 percent and the costof insuring the debt climbed to a six-month high.

Markets should be “concerned” about the possibility of default,Obama said on CNBC yesterday after meeting with chief executives offinancial-services companies including Lloyd Blankfein of GoldmanSachs Group Inc. and Brian Moynihan of Bank of America Corp.

'In Trouble'

“This time's different,” Obama said. “When you have a situationin which a faction is willing potentially to default on U.S.government obligations then we are in trouble.”

After the meeting with top lawmakers, the White House said in astatement that Obama reiterated his unwillingness to negotiate on ashort-term spending bill or the debt ceiling.

“The president remains hopeful that common sense will prevail,and that Congress will not only do its job to reopen thegovernment, but also act to pay the bills it has racked up andspare the nation from a devastating default,” according to thestatement.

Senate Majority Leader Harry Reid, a Nevada Democrat, said afterthe meeting that his party is willing to talk about spendingprograms. “My friend John Boehner, I repeat, cannot take yes for ananswer,” Reid said. “One thing we made clear in that meeting, weare locked in tight on Obamacare.”

The partial shutdown put about 800,000 federal employees out ofwork and shuttered many government functions, including infantnutrition aid, national parks and Internal Revenue Service audits.Other services, such as air-traffic control and Social Securitybenefits, were operating.

A one-week partial shutdown would probably shave 0.1 percentagepoint from economic growth, according to the median estimate ofeconomists surveyed by Bloomberg, with the costs accelerating ifthe closing persists.

The effects of failing to raise the $16.7 trillion debt ceilingwould be even bigger. The government will run out of borrowingauthority Oct. 17, according to the Treasury Department, leavingonly cash to pay the bills.

That stockpile will disappear by Oct. 31 at the latest,according to the Congressional Budget Office, leaving the U.S.unable to pay promised benefits, salaries and interest.

Political Leverage

As the stalemate wears on, both sides are grasping for politicalleverage.

Republicans found theirs on the Mall in Washington, where theycriticized the barricades erected by the National Park Servicearound the World War II memorial.

House leaders proposed five bills yesterday to reopen specificparts of the government. They picked politically popular agencies,forcing Democrats to choose between their party's position againsta piecemeal approach and specific programs they support.

The bills would reopen national parks, provide funding for theNational Institutes of Health, let Washington's city governmentspend its own money, fund the Department of Veterans Affairs andpay National Guard and Reserve forces.

The Washington, parks and NIH bills passed yesterday withbipartisan support. The other measures are set for votes today.

“It is the small steps that can often move us toward aconsensus,” said Representative Jack Kingston, a GeorgiaRepublican.

Senate Democrats said they wouldn't pick and choose federalagencies to reopen, and the White House issued veto threats againstall the bills.

Democrats, meanwhile, tried to take advantage of the split amongHouse Republicans. The party is divided between hard-liners alignedwith Senator Ted Cruz of Texas who are seeking concessions on thehealth law and others who back a bill to reopen the governmentwithout conditions.

At least 20 Republicans have said they would support theSenate-passed plan. They haven't aligned with Democrats onprocedural votes to force Boehner's hand.

One of those, Representative Peter King, a New York Republican,said in an interview yesterday that he made his case privately toBoehner, who asked for more time.

“I think the plan is for the Cruz Republicans to exhaustthemselves,” King said.

Representative Jeb Hensarling, chairman of the House FinancialServices Committee, described a delay of the individual mandate topurchase health insurance as the “bare minimum” Republicans shouldaccept as part of the spending bill. And, he said, the party shouldattach other conditions to the debt ceiling.

Spending Trajectory

“What's going to hurt our economy is our failure to deal withour spending trajectory, which is going to bankrupt us,” the TexasRepublican said in an interview. “Anything that has ever passed forfiscal responsibility in Washington, D.C., has almost exclusivelybeen attached to a debt ceiling.”

Unlike past fiscal feuds, this dispute is more about the healthlaw than the amount of government spending. Democrats say they havealready made a concession by accepting spending levels set underthe across-the-board cuts known as sequestration, which went intoeffect earlier this year and were part of the deal to avoid a 2011default.

The U.S. budget deficit in June was 4.3 percent of grossdomestic product, down from 10.1 percent in February 2010 and thenarrowest since November 2008, when Obama was elected to his firstterm, according to data compiled by Bloomberg from the TreasuryDepartment and the Bureau of Economic Analysis.

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