* Senate leaders said to be close to a deal
* Fate of proposal in House remains uncertain
* Borrowing authority set to expire on Thursday
* Markets rise on hopes for last-minute deal
By Richard Cowan
WASHINGTON, Oct 16 (Reuters) - U.S. Senate leaders raced to strike a last-minute deal on Wednesday to avert a historic lapse in the government's borrowing authority, a breach that could lead to default and deliver a damaging blow to the global economy.
The top Democrat and Republican in the Senate were close to finishing a plan to raise the debt limit - and reopen the partially shuttered government - that could be considered by the full Senate later on Wednesday.
But with the government's borrowing authority set to run out on Thursday, the measure's fate remained uncertain in a deeply divided Republican-controlled House of Representatives that failed twice on Tuesday to produce its own plan.
It is also unclear if lawmakers will simply run out of time. While analysts and U.S. officials have said that the government will still have roughly $30 billion in cash to pay the nation's many obligations for at least a few days, the financial sector may start seizing up on Thursday if no deal is secured.
"I think folks on both sides of the aisle in the Senate are ready to get this done," Republican Senator Saxby Chambliss of Georgia told National Public Radio on Wednesday, a day after chaotic developments frayed the nerves of many members of Congress and global financial markets.
A senior Senate Democratic aide said a deal between Senate Majority Leader Harry Reid and Republican leader Mitch McConnell was nearly completed and could be announced soon.
Major U.S. stock indexes rose more than 1 percent on Wednesday on optimism that lawmakers would strike a last-minute deal, but cautious investors are still wary over the final outcome.
Although the cost of insuring U.S. debt hit its highest in over two years, the dollar held its ground against other currencies and U.S. stock indexes opened higher on Wednesday.
"Our assumption is that there will be a plan," John Chambers, chairman of S&P's Sovereign Ratings Committee, told CBS's "This Morning" program on Wednesday.
Reid and McConnell resumed stalled talks after a roller-coaster day on Tuesday that saw two separate legislative efforts in the House buried after it became apparent too many Republicans were rebelling against their leaders' plans.
Following weeks of bitter fighting among Democrats and Republicans, the temporary layoff of hundreds of thousands of federal workers and turmoil for stock markets, the deal under discussion - if eventually enacted - would basically give President Barack Obama what he has demanded for months: A straight-forward debt limit hike and government funding bill.
The deal would extend U.S. borrowing authority until Feb. 7, although the Treasury Department would have tools to temporarily extend its borrowing capacity beyond that date if Congress failed to act early next year.
With the final details not yet nailed down, the agreement also would fund government agencies until Jan. 15, ending a partial government shutdown that began with the new fiscal year on Oct. 1.
If Congress fails to pass a deal by Thursday, checks would likely go out on time for a short while for everyone from bondholders to workers who are owed unemployment benefits. But analysts warn that a default on government obligations could quickly follow.
Senate aides said the two leaders are exploring possible ways to speed the legislation through the chamber, which often can bog down for days with procedural hurdles.
Republican Tea Party firebrands such as Senator Ted Cruz of Texas have tried to delay passage of a government funding bill as they demanded changes to Obama's signature healthcare law in return. A senior Senate aide said there were "indications" the Senate might be allowed to move quickly on a final deal.
The budget deadlock led to federal agency shutdowns at the beginning of the fiscal year on Oct. 1 as Obama and his fellow Democrats stood firm against changing the law.
If the Senate succeeds, House Speaker John Boehner will have to decide whether to allow passage of a bill that many of his fellow Republicans might oppose, a decision that could impact the top Republican's political future.
The speaker probably would have to rely on Democratic votes to pass any measure given the tight timeline.
Republican Representative Sean Duffy of Wisconsin said most House conservatives would likely reject the Senate's plan, but "more than likely it'll pass," he told MSNBC's "Morning Joe" on Wednesday.
Uncertainty over Washington's ability to avert a default led Fitch Ratings to warn it could cut the sovereign credit rating of the United States from AAA, citing the political brinkmanship over raising the federal debt ceiling.
Numerous polls show Republicans have taken a hit in public opinion since the standoff began and the government partially closed. Another Gallup survey this week showed American confidence in the U.S. economy fell another 5 percentage points last week as the government shutdown continued.