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Despite warnings on U.S. defense cuts, little action to stop them

By David Lawder, Roberta Rampton and Andrea Shalal-Esa

WASHINGTON (Reuters) - U.S. defense officials and their allies in Congress did their best on Wednesday to create a sense of crisis about steep impending budget cuts, but their warnings failed to produce any visible result.

Instead, partisan divisions hardened over how to avoid the automatic spending reductions set for March 1, with Democrats and Republicans offering solutions that appeared irreconcilable and trading accusations designed to shift the blame across the aisle.

If Congress fails to act by March 1, across-the-board spending cuts of $85 billion over seven months will hit federal agencies, split evenly between military and domestic programs. Defense contractors and economists are predicting hundreds of thousands of jobs could be lost within a matter of months.

The positions are much the same as they were during the New Year's "fiscal cliff" drama: Republicans want to pay for a short-term delay with other spending cuts, while Democrats want the wealthy to pay more in taxes to help cover the gap.

Missing is the atmosphere of doom or worry about a market reaction that pervaded the fiscal cliff controversy.

"It's not like on March 2 something horrible happens like a market crash," said a U.S. Senate aide, attempting to explain the inactivity in Washington. "It'll be cumulative, unlike the cliff," said the aide, who asked not to be identified.

Evidently concerned about that attitude, the defense sector ratcheted up efforts on Wednesday to sound the alarm.

Defense Secretary Leon Panetta told students at Georgetown University that a "a dangerous and callous attitude" was "developing among some Republicans and some Democrats, that these dangerous cuts can be allowed to take place in order to blame the other party for the consequences. This is a kind of 'so what?' attitude that says, 'Let's see how bad it can get in order to have the other party blink.'"

He said the cuts, known in budget jargon as a "sequester," would force the Pentagon to put as many as 800,000 civilian employees on unpaid leave for 22 work days, reduce Navy operations in the Western Pacific by up to one-third and cut Air Force flying hours.

Later on Wednesday, Panetta delayed deployment of an aircraft carrier strike group to the Middle East because of the budget uncertainty, and the Pentagon said it would seek a smaller-than-expected pay increase for services members in the 2014 fiscal year that begins in September.

At the White House, a day after Obama urged Congress to pass a small package of spending cuts and tax reforms to avert the sequester, senior officials met with six major defense contractors and the head of the Aerospace Industries Association, the industry's largest lobbying group.

"The focus of their conversation was the potentially devastating impact of the sequester going into effect," White House press secretary Jay Carney told reporters.

Carney noted that one of the companies, Northrop Grumman Corp, had a supply chain of 20,000 small businesses that would also be hurt by the broad cuts.

One industry executive said last week's fourth-quarter GDP report, which showed a 22.2 percent drop in defense outlays, had unnerved White House officials. "The recent GDP report helped them realize how much of a role defense spending and aerospace play in the overall economy," the executive said.

AIR FORCE WORRIES

Separately, the U.S. Air Force told Congress it would have to curtail its orders for Lockheed Martin Corp's F-35 fighter jet, restructure a $52 billion tanker contract with Boeing Co and reduce its flying hours by 18 percent if lawmakers did not avert the cuts.

In a draft presentation to the House of Representatives Armed Services Committee obtained by Reuters, the Air Force said it faced shortfalls of $1.8 billion in war funding and $12.4 billion overall if Congress did not forestall the cuts.

While leaders of both parties say they share the concern about the cuts, the proposals they continued to advance on Wednesday were far apart.

Aides said Democratic lawmakers had reached a consensus to join Obama in demanding more revenues as part of any deal.

Democrats believe that the American public backs that position. At a retreat in Annapolis, Maryland, they discussed new polling data showing that a strong majority of voters wants the wealthiest 2 percent of Americans - and large corporations - to pay more in taxes, even after the fiscal cliff deal raised tax rates on income above $450,000.

Republicans say that they have already given ground on more tax revenue, and any deficit reduction from here on out must come from spending cuts, a position repeated on Wednesday by Republican House of Representatives Speaker John Boehner.

In the U.S. Senate, a group of Republicans on the Armed Services Committee proposed delaying the spending cuts, known as a sequester, until the 2013 fiscal year ends on September 30.

But their plan would replace the $85 billion in cuts with savings achieved by shrinking the federal workforce by attrition over a multi-year period, an approach unacceptable to Democrats.

As government workers left their jobs, they would not be replaced. The plan also would extend a congressional pay freeze that was put in place as part of the January 1 fiscal cliff deal.

Those lawmakers said their plan would protect vital defense programs and military readiness.

"To my Republican colleagues ... if you feel comfortable with cutting the government this way, then you have lost your way as much as the president," said Senator Lindsey Graham of South Carolina, issuing a challenge to those in his party willing to accept the cuts.

"I am sure Iran is very supportive of sequestration. I am sure al Qaeda training camps all over the world must be pleased with the fact that sequestration will gut the CIA and the intelligence platforms that follow them around," Graham said.

Lawmakers whose districts have heavy concentrations of military installations and defense manufacturing are growing nervous about the looming cuts.

Representative Rob Bishop, a Republican member of the Armed Services Committee, said he would support a postponement of the cuts without any offsetting savings.

"I'll take any kind of postponement I can get," Bishop said, worried about the defense workers in his Utah district. "I feel for my constituents who have had their salaries frozen for years."

(Additional reporting by David Alexander, Richard Cowan, Rachelle Younglai and Kim Dixon; Editing by Fred Barbash, Eric Walsh and Peter Cooney)

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