US Senate leaders agreed to extend a workers tax holiday and jobless benefits, but further dented President Barack Obama's authority by forcing him to look again at a contentious pipeline plan.
The deal could end a bitter, year-end standoff between Republicans and Democrats, but in effect will simply set battle-lines of a new fight over the same issues in the hothouse atmosphere of election year 2012.
Though Obama will achieve his goal of ensuring that US workers do not get a tax hike on January 1, the extension of a payroll tax hike and unemployment benefits will last only two months, not the year he had originally pushed for.
The Senate deal also thrusts the contentious Keystone XL pipeline, to carry oil from Canada's tar sands to the US Gulf Coast, back onto the political agenda.
Obama had put off a decision on the project, which pits environmentalists against labor unions and business interests in his political base, until after his bid for a second term, drawing Republican howls.
The fact the White House apparently reluctantly agreed to legislative language requiring Obama to ostensibly reconsider it within 60 days will enrage environmentalists who lean Democratic and campaigned against the project.
The US Senate was expected to vote on the package on Saturday, and the House of Representatives could take it up on Monday, at the end of a frenetic period of political maneuvering between the White House and Republicans.
The White House put a brave face on the outcome, saying that Obama had succeeded, after a months-long campaign, in forcing Republicans to extend the payroll tax cut in a move designed to stimulate the struggling US economy.
"The President said that Congress cannot go home without preventing a tax increase on 160 million hardworking Americans, and the deal announced tonight meets that test," said White House Communications Director Dan Pfeiffer.
"This is an important step towards enacting a key provision of the President's American Jobs Act and a significant victory for the American people and the economy."
Democratic Senate Majority Harry Reid added: "I think (Americans) should know that we fought hard to make sure that they get their checks, and their deductions come January 1."
But Republicans crowed that they had forced Obama to take up the pipeline project, which they say will create 20,000 jobs, even after he said he would reject any attempt to link it to the payroll tax holiday bill.
"This bill will stop President Obama's delaying tactics," said Indiana Senator Richard Lugar.
"It is absolutely incredible that President Obama wants to delay a decision until after the 2012 elections apparently in fear of offending a part of his political base."
The Senate agreement requires the State Department to issue a permit for the Keystone project within 60 days unless Obama certifies that it is not in the US national interest.
Such a finding would expose Obama to politically explosive Republican charges in an election year that he rejected the creation of 20,000 jobs, at a time of high unemployment.
Obama aides however point to a State Department warning this week that the Republican language would in effect scotch the project because 60 days would be too short to fulfill legally required environmental studies on the plan.
"It's not enough time and it kills the project," said a Democratic congressional aide on condition of anonymity.
Seeking to stimulate the sluggish recovery, Obama had asked Congress to extend a payroll tax holiday for a year to give workers a $1,500 tax cut next year.
Obama's Democratic allies had initially hoped to fund the project by imposing a tax on the country's wealthiest Americans who earn more than $1 million a year.
But they met stiff opposition from Republicans, who control the House, and had to abandon the plan.
There was one break in the partisan fury though as the House of Representatives voted 296-121 to pass a $915 billion bill to fund the government through fiscal 2012 -- averting a pre-Christmas shutdown.