* Democrats call for new stimulus
* Biden group pushes ahead in deficit-reduction talks
* CBO says benefits will swamp economy in long term (Adds Baucus, other details)
By Richard Cowan and Andy Sullivan
WASHINGTON, June 22 (Reuters) - Democratic leaders called on Wednesday for new spending and tax cuts to boost the sluggish U.S. economy, setting up a fresh hurdle for bipartisan efforts to head off a government debt default this summer.
At the same time, a new report warned that the country could face a European-style debt crisis unless Washington cuts spending or raises taxes.
The report by the nonpartisan Congressional Budget Office adds urgency to the work of negotiators, led by Vice President Joe Biden, who are trying to find trillions of dollars in savings as part of a deal that would allow Congress to sign off on new government borrowing before the U.S. runs out of money to pay its bills.
As the group faces competing demands for stimulus and austerity, some have suggested that it may not be able to get a deal done in time to head off a debt default in early August.
Senate Democrats want the deal to include a payroll tax cut, more money for highway construction and clean-energy subsidies to bring down the 9.1 percent unemployment rate.
"Get the recovery right before you get in this deficit-cutting mode," Assistant Senate Democratic Leader Dick Durbin told reporters. "Get people back to work."
Republicans said that idea is not likely to go far in the Biden-led talks, which have largely focused on spending cuts.
"They're not talking about spending money in there," said Ryan Patmintra, spokesman for Senator Jon Kyl, one of two Republicans participating in the talks. Many Republicans view President Barack Obama's 2009 stimulus package as an $830 billion failure and say spending cuts would help the recovery.
Federal Reserve Chairman Ben Bernanke questioned that approach. "I don't think that sharp, immediate cuts in the deficit would create more jobs," he told reporters. "In the short run ... fiscal tightening is at best neutral and probably somewhat negative for job creation," he added.