Bowing to the threat of President Bush’s veto pen, Democratic leaders in the House and Senate indicated they would work with Republicans to complete an omnibus spending bill close to Bush’s budget cap while keeping most earmarks and trying to protect other Democratic spending priorities.

Democrats also appeared poised to accept a $70 billion package of spending for the wars in Iraq and Afghanistan with no strings attached, although no Iraq money would appear in the initial House version. Democrats had been considering a trade of war funding for $11 billion in domestic spending and $7 billion in emergency spending, but Bush’s veto threat now has Democrats on the verge of approving another fat check for the war that they have repeatedly sought and failed to end with little in return except the ability to go home for Christmas.

The Iraq money is expected to be added by Senate Minority Leader Mitch McConnell (R-Ky.) and sent back to the House. If that happens as expected, “I certainly will be voting against it,” Speaker Nancy Pelosi (D-Calif.) said.

But much like an earlier Iraq supplemental, which most House Democrats including Pelosi voted against, enough Democrats and Republicans are likely to back the overall package with war funding included to have it sent to the president.

The Bush administration denied reports Wednesday night it had already agreed to the extra veterans spending without offsets. “These reports are erroneous,” Office of Management and Budget spokesman Sean Kevelighan said. “No deal has been reached.”

The White House made clear there was no deal yet.

“We are encouraged by reports of movement in the right direction, but to know whether there is a bill the president can sign, we need to see the details,” Kevelighan said.

“In particular, we need to know the top line, we need to know how they spend within the top line, we need to know if they are abusing emergency designations, we need to know if there are unacceptable policy riders, and we need to know how they are treating funding for the troops.”

Leaders rejected an earlier proposal by House Appropriations Chairman David Obey (D-Wis.) to nix thousands of earmarks to get down to the president’s spending level, and Democrats also opposed a proposal from McConnell for an across-the-board cut. Instead, Democrats have told each Appropriations subcommittee chairman to find savings within their jurisdiction, which could come from a combination of cutting earmarks, individual programs and across-the-board cuts.

A final package isn’t likely to be completed until early next week, and House Majority Leader Steny Hoyer (D-Md.) said Democrats meantime would bring a short-term continuing resolution to the floor on today to keep the government running.

Pelosi outlined the plan at a press conference Wednesday afternoon, saying it would be at the president’s number but with Democratic priorities, protecting programs like cancer research at the National Institutes of Health.

“This is a negotiation about a bill that will be signed by the president,” Pelosi said. “We don’t want the bill to be vetoed.”

Senate Majority Leader Harry Reid (D-Nev.) called the omnibus a “moving target” but said he hopes to have the House proposal on the Senate floor by early next week.

Though Democrats have agreed to come down significantly from the $22 billion over the president’s request that they originally wanted to spend, Reid said he does not think they will actually tailor the omnibus exactly to the president’s budget cap.

“It’ll be a little bit over,” he said.

While it was unclear whether the White House was actively involved in negotiations, a senior Senate GOP aide said, “Senate Democrats and Republicans are united” on the new omnibus strategy.

The aide added that Republicans are operating under an agreement by which the regular appropriations will come in at the president’s overall number, $933 billion, but that an additional $3.7 billion in emergency spending for veterans’ health care would be included as well.

House Republicans, however, criticized the idea of adding veterans funding on top of the $933 billion cap, and also warned Democrats against using the bill to change policies opposed by Republicans on abortion and other issues.

“The president’s number is fine as long as you don’t have a lot of gimmicks to go around it and you don’t have a lot of authorizing policies that you couldn’t get through any other way,” House Minority Whip Roy Blunt (R-Mo.) said. Blunt specifically rejected the idea of adding the veterans spending atop the cap, even though Bush did not provide room for the extra veterans spending in his budget.

“Nine-thirty-three is 933,” Blunt said, “it’s not 936.4.”

House Minority Leader John Boehner (R-Ohio), meanwhile, called the Democratic talk of using the president’s number and reaching out to Republicans a positive development. “It’s certainly a step in the right direction,” Boehner said, although he said he has not been party to any negotiations.

In other unfinished business, Reid said he likely would file cloture on a controversial terrorist surveillance bill on Friday with a vote likely on Monday. Following completion of that bill, the omnibus would be taken up. Reid said he expects to finish both the farm bill and energy legislation this week.