* Senate leaders optimistic over government funding legislation
* Democrats eye more spending flexibility for domestic agencies
By Richard Cowan and David Lawder
WASHINGTON, March 5 (Reuters) - The U.S. Congress is moving rapidly to pass legislation funding the federal government through Sept. 30, as Senate leaders on Tuesday expressed eagerness to avoid any threat of agency shutdowns when money runs out on March 27.
"I'm cautiously optimistic we're going to reach a solution before we leave here for the Easter recess," which is scheduled to begin on March 23, Senate Majority Leader Harry Reid told reporters on Tuesday.
Reid's Republican counterpart, Senator Mitch McConnell, gave a similarly upbeat assessment, telling reporters, "There seems to be no interest on either side in having a kind of confrontational government shutdown scenario."
Their comments follow Republicans' introduction of a new funding bill in the House of Representatives that will keep in place $85 billion worth of controversial, across-the-board spending cuts triggered on Friday.
The House measure, expected to win passage on Wednesday, aims to partially shield some defense and veterans' programs from the indiscriminate cuts by including two updated military-related spending bills. It also will shift some funds to security-related efforts such as border and embassy security, prisons and FBI operations.
Senator Barbara Mikulski, the Democrat who chairs the Senate Appropriations Committee, expressed frustration with the lack of flexibility for domestic programs such as education in the Republican plan.
"It's only guns. We need butter," Mikulski told reporters.
The White House also said it was concerned that domestic agencies would be forced to operate under older, more restrictive spending. In a statement, it said it would work with Congress to "refine the legislation" and would keep pressing lawmakers for a replacement to the automatic sequester cuts.
Next week, Senate Democrats will move their version of the bill for a vote and are likely to add funding flexibility for some domestic programs, party aides said.
Both the House and Senate versions are expected to cap discretionary spending at $1.043 trillion for the full 2013 fiscal year, but this would be reduced to around $982 billion if the sequester cuts remain in place.
PICKING THEIR BATTLES
Over the past couple of years, these short-term government funding bills, called "continuing resolutions," have been used as leverage by Republicans to try to lower spending. Amid Democratic resistance to some of the deeper spending cuts sought by Republicans, there were fears that negotiations would break down, forcing widespread shuttering of government agencies.
With House Republican conservatives feeling more confident now that they have locked in the $85 billion in new savings for the next seven months, the appetite for yet another showdown seems to have waned.
"What remains to be seen is whether this move ... apparently away from a crisis, is truly a shift in strategy for Republicans, or just a short break from extremism that they've had over the last few years," Reid said.
Once the funding bill for the remainder of this fiscal year is enacted, Congress promptly will turn to its next fiscal battle: a budget blueprint for the next fiscal year that begins on Oct. 1.
Republican House Budget Committee Chairman Paul Ryan next week is expected to release an ambitious budget blueprint that aims to achieve balance in 10 years. But to achieve this, he may have to row back on at least one promise he made last year as the Republican vice presidential candidate - that any cuts to the Medicare health program will not affect anyone 55 or under.
He has floated a plan to push the age threshold up to 56 to reap additional savings from the program.
And sometime this summer, Congress and President Barack Obama will be engaged in yet another fight over the need to raise the U.S. Treasury Department borrowing limit.
It is unclear whether either of these measures will bring Democrats and Republicans together on a long-term deficit-reduction deal.
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