President Obama has already pledged to veto the aggressive cuts
Fears over the strength of the US economic recovery were growing last night after a highly unusual all-night session of the Republican House of Representatives agreed to slash the federal budget by $61bn by the end of September.

The deal, thrashed out in the early hours, was immediately condemned by US Treasury Secretary Tim Geithner, who said the cuts would hit the fragile economy.

It now appears there will be a potentially damaging stand-off between President Barack Obama and Republican leaders with a possible shut-down of the federal government if agreement cannot be reached in the next fortnight.

"The continuing resolution as passed by the House would undermine and damage our capacity to create jobs and expand the economy," Mr Geithner said at the G20 summit in Paris yesterday.

President Obama has already pledged to veto the aggressive cuts. The proposal must now be debated by the Senate, the upper chamber of Congress, where Democrats hold a slim majority. There is a growing danger the federal government will close down on March 4 if a compromise short-term spending deal cannot be struck between the White House and two houses of Congress. Such paralysis is likely to damage US economic prospects and therefore the chances of continuing global recovery.

Mr Obama is likely to push for a budget extension freezing spending at 2010 levels while deeper cuts are negotiated. The multi-billion dollar cuts package reveals the big division between US political parties on how to support growth. Republicans say the deficit must be brought under control if America is to experience a strong recovery.

The House Speaker, John Boehner, said the legislation was part of Republican efforts "to liberate our economy from the shackles of out-of-control spending". But Democratic Leader, Nancy Pelosi, said the Republican-backed bill would damage the economy.

"They have made matters worse - passing a spending bill that destroys jobs, weakens the middle class, hurts schools and young adults, eliminates assistance to homeless veterans, and diminishes critical investments in our future," she said. Republicans crushed the Democrats in November's mid-term elections after a campaign mainly fought on government spending. Emboldened by that win and with their ranks buoyed by fiscal conservatives from the Tea Party movement, the Republicans insist cuts must be made immediately.

The vote paves the way for fiscal policy clashes up to the 2012 presidential election. Republicans have vowed to cut the size of government, a direct challenge to the Keynesian economics pursed by the White House as the US struggles with the deepest downturn since the Great Depression eight decades ago.

"The American people have spoken," said Republican congressman Tim Huelskamp, saying that the people wanted Washington to stop its out-of-control spending now.

Congress is in recess this week after tomorrow's President's Day holiday, leaving five working days to forge a deal before the current budget expires on Friday, March 4.

If no compromise can be reached, the government will be forced to close - the so-called "nuclear option". That last happened in 1995 in a budget row between President Bill Clinton and House speaker, Newt Gingrich. With several states also embroiled in battles over cuts, Wall Street is watching the current clashes over the deficit nervously.

US stocks continued their steady upward progress last week on all the major market indices. But against a backdrop of turmoil in the Middle East, the sovereign debt crisis in some European economies, stubbornly high US unemployment and now the federal and state budget showdowns in the US, some analysts are predicting a retrenchment.

The IMF has previously predicted that US gross public debt would nearly double from 62pc of GDP in 2007 to 111pc by 2015.