WASHINGTON  — With scant time to spare, US President Barack Obama signed legislation Tuesday to avoid an unprecedented national default that he said would have devastated the US economy. But the truce with Republicans that defused the crisis seemed to be fading already.

US President Barack Obama signs the Budget Control Act of 2011 in the Oval Office at the White House in Washington, August 2, 2011. US. [Photo/Agencies]

Wall Street crumpled, dismayed by reports of new economic weakness and unimpressed by Congress' prescription. The Dow Jones industrial average sank by 266 points, its eighth straight losing session, and biggest.

The compromise deal to persuade GOP lawmakers to raise the federal debt limit — US borrowing was to collide with it at midnight — will cut federal spending by $2.1 trillion or more over the next decade.

But Obama immediately challenged Republicans to accept higher taxes on the wealthy in a second round of deficit cuts this fall. They adamantly refused to accept that idea during the past months' dispute.

A stern-faced Obama said at the White House that action to raise the debt limit had been essential but more — and different — steps were badly needed.

"We've got to do everything in our power to grow this economy and put America back to work," the president said, arguing forcefully for including revenue increases as well as spending cuts in the next round of efforts to trim huge government deficits.

It was the same call the GOP successfully resisted in the bill just approved, and there was little evidence of a change in position.

"The American people agreed with us on the nature of the problem. They know the government didn't accumulate $14.3 trillion in debt because it didn't tax enough," said the party's leader in the Senate, Mitch McConnell of Kentucky.

Obama placed his signature on bill in the privacy of the Oval Office less than two hours after a bipartisan 74-26 vote in the Senate. The House approved the measure Monday night on a 269-161 roll call that also reached across party lines and was sealed by a rap of the gavel by Speaker John Boehner.

The bill allows a quick $900 billion increase in borrowing authority as well as a first installment on spending cuts amounting to $917 billion over a decade.

Without legislation in place by day's end, the Treasury would have been unable to pay all the nation's bills, leading to a potential default for the first time in history. Administration officials warned of disastrous consequences for an economy that shows fresh signs of weakness on a near-daily basis as it struggles to recover from the worst recession in decades.

The White House and congressional leaders said legislation was important to reassure investors at home as well as overseas, and also to preserving the nation's AAA credit rating. Following passage of the debt deal, Moody's Investors Service, one of the three main ratings agencies, said it was retaining its triple-A rating on US bonds but with a negative outlook to show there is still a risk of a downgrade.

This week's peace pact between the two parties is unlikely to be long-lived.

The bill sets up a powerful 12-member committee of lawmakers with authority to recommend fresh deficit savings from every corner of the federal budget.

Politically sensitive benefit programs such as Social Security and Medicare will be on the table as the panel of six Republicans and six Democrats works against a Thanksgiving deadline. So, too, an overhaul of the tax code. Congress will have until Christmas to vote on the recommendations without the ability to make changes.

As an incentive for Congress to act, failure to do so would trigger $1.2 trillion in automatic spending cuts, affecting the Pentagon as well as domestic programs.

Even before the president signed the legislation, he and Republicans were maneuvering for political position on the next stage.

"We can't balance the budget on the backs of people who have borne the biggest brunt of this recession," the president said, renewing his call for higher taxes on the wealthy. "Everyone is going to have to chip in. It's only fair."

Senate Republicans say it will not happen.

"I'm comfortable we aren't going to raise taxes coming out of this joint committee," McConnell said in an interview with Fox on Monday.

In a speech shortly before the vote, he predicted instead a renewal of the most recent struggle over spending cuts.

The debt limit will have to be raised shortly after the 2012 election, he said, predicting that no president of either party will be "allowed to raise the debt ceiling without ... having to engage in the kind of debate we've just been through."

He conceded that Republicans got only part of what they wanted in the deal, and he pointed to next year's elections with control of the White House and Congress at stake as a chance to gain greater clout.

"Republicans only control one half of one third of the federal government, but the American people agree with us," he said.

Senate Majority Leader Harry Reid, said the period immediately ahead "is going to be painful," particularly if Republicans insist they will not raise any taxes.

Numerous Democrats have complained about the concessions Obama accepted in the deal, and Reid and other Democrats sought immediately to change the subject.

"We now have the chance to pivot away from budget battles to jobs," said Sen. Chuck Schumer. "We can reset the debate, and that's what we intend to do."

Obama spoke in less partisan terms at the White House.

"Both parties share power in Washington, and both parties need to take responsibility for improving this economy," he said.

This week's legislation ratified an agreement that took shape slowly. For months there had been partisan flare-ups and internal disagreements within each party, then suddenly things changed last weekend when McConnell and Vice President Joe Biden bargained by telephone.

The immediate impact is to raise the debt limit by $400 billion, giving the Treasury what it needs to avoid exceeding the current $14.3 trillion cap. An additional $500 billion increase will be available, subject to disapproval by Congress.

In exchange, spending is to be cut by $917 billion over a decade from Cabinet-level agencies and the thousands of federal programs they administer.

The bill's second phase begins with the creation of the special committee of lawmakers. Depending on its success in recommending savings that Congress ratifies by Christmas, the nation's borrowing authority will rise by $2.1 trillion or as much as $2.5 trillion.

Either way, it is estimated to be enough to avoid a rerun of the current crisis before the 2012 elections.

That was Obama's bottom-line demand in a negotiating endgame, and while Republicans ridiculed him over it, they consented.

Yet Boehner and McConnell were able to wring key concessions of their own.

The maneuvering began hours after Congress convened last January, the House under control of Republicans for the first time in four years.

At a news conference then, Boehner announced the administration had notified him an increase in the debt limit would be needed, and he said any change must include "meaningful action" to cut spending.

Initially, the White House resisted the linkage, then relented.

On May 9, Boehner laid down a second condition — any debt limit increase must occur in tandem with spending cuts that were greater in size.

Obama wanted a balanced plan that included both spending cuts and higher revenues, and for a brief time, it appeared that might be in the offing.

Months later, he and Boehner sought a sweeping agreement that would have trimmed deficits by $4 trillion or more, possibly including curbs on the rise on Social Security benefit checks and an increase in the age for Medicare benefits from 65 to 67.

By Boehner's own account, he agreed to consider an overhaul of the tax code under which government revenues would rise from current levels. It was carefully framed — the increase would result from assumed greater economic expansion.

Then a group of bipartisan senators unveiled a plan of their own, calling for even higher additional revenues.

In response, Obama raised his demand, and Boehner announced a little more than two weeks ago he was calling off those talks.

That set the stage for a partisan endgame in which House Republicans and Senate Democrats drafted rival bills — then watched them rejected by the other side — before McConnell and Biden worked out a final deal.