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Obama named Treasury Secretary Tim Geithner and budget director Jack Lew to work with congressional Republicans and Democrats on a deal to prevent broad tax increases from hitting middle-income Americans next year.

The working group will also tackle the issue that most divides the two political parties: what to do about extending tax cuts for the wealthiest Americans.

At their first White House meeting since the November 2 congressional election, Obama and Republicans stuck to their divergent positions but the president said they agreed the issue must be resolved by the end of this year.

"We agreed that there must be some sensible common ground, so I appointed my Treasury Secretary, Tim Geithner, and my budget director, Jack Lew, to work with representatives of both parties to break through this logjam," Obama said.

If no agreement is reached, all tax-paying Americans could see higher bills next year, giving Republicans a chance to score politically by making tax cuts their priority when taking control of the House of Representatives in January.

Finding common ground before then will be tricky.

Chris Van Hollen, a top Democrat in the House of Representatives, said the chamber could vote on Thursday to extend lower tax rates on income levels up to $200,000 for individuals or $250,000 for couples, allowing rates for the wealthiest 2 percent of Americans to rise.

That vote is seen as a gesture to liberal Democrats, who want to go on record opposing an extension for top earners. If the measure passes the House, it will likely die in the Senate, where Democrats would not have the votes to make it law.

Knowing that, the president may have to agree to extend cuts for Americans of all income levels for one to three years -- an onerous option to many Democrats but one that may be the most likely outcome if the two sides agree on anything at all.

But many analysts are not optimistic.

Charlie Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group, said there was less than a 50 percent chance that the tax cuts will be extended.

WIDE DIFFERENCES

Obama said he and many Democrats continue to believe it would be "unwise and unfair" to spend $700 billion to extend tax cuts for the wealthiest Americans while also trying to bring down the U.S. deficit.

Republican leaders, emboldened by gains in the elections, argued it would be better for the economy if tax cuts for all Americans were extended.

"Things can change but we are talking about Thursday," Representative Chris Van Hollen, a member of the Democratic leadership, said after meeting with other lawmakers.

Lawmakers are scrambling to reach a deal before the end of the year to delay expiration of tax cuts enacted under former President George W. Bush. Democrats want extension of lower rates for income up to $200,000, while Republicans want lower rates for income above that amount to be extended as well.

Earlier Tuesday, congressional leaders met with President Barack Obama, where they agreed to form a working group to resolve the issue.

"It was very positive in the spirit of moving forward and doing so in a way that helps to create jobs, reduce the deficit and lower taxes for the middle class," House Speaker Nancy Pelosi said after the meeting.

Still, Democrats are divided on strategy.

Heading into a Democratic House leadership meeting to discuss the issue, Representative John Larson said "extension of all the tax cuts in the House is pretty much a non-starter."

Others said there is room for compromise. Representative Richard Neal, who heads a tax subcommittee in the House, said there needed to be a vote on middle-class only, even if it cannot pass the Senate.

"Both sides are probably going to need a vote before they come to some middle ground," Neal said. "Middle ground is not inescapable."

Neal has advocated a compromise where taxes would go up only on income above $500,000. More liberal members, however, may not be enthusiastic about that benchmark.

(Reporting by Kim Dixon; writing by Andy Sullivan; editing by Mohammad Zargham)

Still, a faster-than-expected fall in prices for U.S. single-family homes in September underscored the hurdles remaining for the recovery.

The Conference Board, an industry group, said its index of consumer attitudes increased to 54.1 in November, the strongest since June, from a revised 49.9 in October. Analysts polled by Reuters forecast a reading of 52.6.

Separately, the Institute for Supply Management-Chicago's business barometer rose to 62.5 in November, up from 60.6 in October and above a forecast from economists.

The nation's high unemployment rate has fueled worries about the consumer's ability to spend, although U.S. store chains showed a strong start to the holiday shopping season after last Thursday's Thanksgiving holiday.

The confidence data "backs up what we've been seeing in retail stores, which is that consumers have been spending," said Wayne Kaufman, chief market analyst at John Thomas Financial n New York.

Standard & Poor's/Case-Shiller composite index on Tuesday showed home prices in 20 metropolitan areas declined 0.8 percent in September from August on a seasonally adjusted basis, more than the decline of 0.3 percent expected by economists in a Reuters poll.

Prices rose 0.6 percent from a year earlier, S&P said, but that was slower than the 1.1 percent expected.

"The data confirms what I think a lot of economists suspected, which was that we would see house price weakness again after the expiration of the first-time home-buyer tax credit," said Christopher Low, chief economist at FIN Financial in New York.

In the U.S. markets, lingering worries about euro-zone sovereign debt overshadowed the data, pushing U.S. stocks lower, benchmark 10-year Treasury note prices higher and the dollar up against the euro.

(Additional reporting by Corbett Daly in Washington and Ryan Vlastelica and Emily Flitter in New York; Editing by Padraic Cassidy)

Obama will host Republicans John Boehner, the next Speaker of the House of Representatives, and Mitch McConnell, the party's leader in the Senate, as well as Democrats Nancy Pelosi, the current Speaker, and Harry Reid, the Senate Majority Leader, at 10:30 EST at the White House.

Taxes will be at the top of their agenda.

With a broad victory in November 2 elections behind them, Republicans are eager to force Democrats to agree to extend Bush-era tax cuts for wealthy Americans as well as the middle-class constituency that concerns Obama the most.

Democrats have been in disarray about how to proceed, despite an impending deadline: the tax cuts expire at the end of this year, and Obama is keen to avoid a situation in which American families making less than $250,000 a year face a tax hike on Jan 1.

To prevent that, he may have to agree to extend cuts for Americans of all income levels for one to three years -- an onerous option to many Democrats, but one that may be the most likely outcome if the two sides agree on anything at all.

Obama has said the United States cannot afford to pay the $700 billion it would cost to extend tax cuts for the rich, but he has also signaled a willingness to compromise after the "shellacking" his party received in this month's election.

The White House said a deal was unlikely to be reached at Tuesday's meeting, which Obama said he hoped would jump-start a better relationship between him and the newly empowered Republicans.

"My hope is that tomorrow's meeting will mark a first step toward a new and productive working relationship," Obama said. "Because we now have a shared responsibility to deliver for the American people on the issues that define not only these times but our future -- and I hope we can do that in a cooperative and serious way."

GET THE JOB DONE

Boehner and McConnell, who could become Obama's main adversaries next year, wrote in an opinion piece that their party would insist on extending tax cuts for everyone during the "lame duck" congressional session that ends this year.

Republicans will control the House and have greater strength in the Senate next year.

"If President Obama and Democratic leaders put forward a plan during the lame-duck session to cut spending and stop the tax hikes on all Americans, they can count on a positive response from Republicans," the two men wrote in a Washington Post piece published on Tuesday.

"If the president and Democratic leaders don't act before the end of the year, however, House and Senate Republicans will work to get the job done in the new Congress. But we hope it doesn't come to that."

The Republicans will put that position on the table during the meeting with Obama, which will also be attended by Vice President Joe Biden, Treasury Secretary Tim Geithner, budget director Jack Lew and other congressional leaders.

Obama invited the congressional leaders for a White House dinner earlier this month, but it was put off for scheduling reasons, which some Democrats interpreted as a Republican snub of the president's outstretched hand.

(Additional reporting by Kim Dixon and Thomas Ferraro; editing by Chris Wilson)

Japanese companies cut production for the fifth month and by the biggest margin since February 2009, while South Korea's industrial output fell for the third month in a row, disappointing markets which had bet on a rebound.

In contrast, India asserted itself as a regional standout, reporting on Tuesday that its economy grew 8.9 percent in the past quarter from a year earlier.

Asia's third-largest economy handily beat market forecasts, but it has a long way to go to become a global source of demand that could fill the void left by debt-ridden Europe and the United States, which are struggling to take off.

The fall in Japan's output was expected -- in fact a drop of 1.8 percent was smaller than the forecast 3.3 percent decline -- after a key stimulus measure, incentives for buyers of fuel-efficient cars, expired in September, and exports continued to cool.

The drop, however, cemented expectations that the world's third-largest economy after the United States and China would contract in the final quarter of the year after a stimulus-driven spurt in the third quarter.

South Korea, among the first economies to regain cruising speed after the global recession, is also losing steam, though Seoul still bets on solid export growth next year.

"The inventory rebuilding cycle after the recession has come to an end, and what we're left with is final domestic demand, which isn't doing that well across the globe," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong.

"We will see some slowdown in G3 economies and Asia next year. With the European situation unraveling, the risks are more conspicuous."

Weak output reports added to the bearish tone in financial markets, with Asian stocks .MIAPJ0000PUS and the euro under pressure from fears that other euro zone nations may be forced to seek help after Ireland's 85 billion euro rescue.

ASIAN ECONOMIES COOLING MORE THAN EXPECTED?

The numbers follow reports from across Asia that showed most economies were losing traction in the third quarter faster than thought as the initial spurt of foreign demand late last year and early in 2010 waned.

Economists had long expected Asia and the world economy would slow in the second half of this year and early in 2011 as the rebuilding of inventories that had been depleted during the recession was drawing to an end and the effects of stimulus packages were wearing off.

But the cool-down came sooner and turned out to be more pronounced than many economists had anticipated. The economies of the Philippines, Thailand and Singapore all contracted in the past quarter, while growth in South Korea, Taiwan and Indonesia slowed markedly.

That leaves China, which slowed only marginally to a 9.6 percent annual clip in the third quarter, and India, as the mainstays of growth in the region.