WASHINGTON: World markets soared Wednesday after a tense New Year break, relieved after US lawmakers agreed a last-minute deal to avert massive tax hikes and pull their nation back from the fiscal cliff.

Congress voted overnight on a stop-gap agreement that dodged across-the-board tax hikes and automatic spending cuts that had threatened to unleash economic turmoil and perhaps drive America back into recession.

World stock markets, which had been jittery leading into the New Year as they awaited a clear signal on the crisis, responded with a strong rally.

European and Asian stocks rose sharply before the Dow gained more than two percent and the S&P 500 had its best day of trade in over a year, closing more than 2.5 per cent to the good.

The hard-fought agreement, a political victory for President Barack Obama's White House, raised taxes on the very rich and delayed the threat of $109 billion in automatic spending cuts for two months.

It will prove a temporary respite. The Democratic administration and the Republican-controlled House of Representatives face several clashes in the coming months on spending cuts and raising the government debt ceiling.

But the immediate danger of the “cliff” – an artificial budget deadline previously engineered by Congress in order to force itself to deal with the thorny tax and spending issues – was at least avoided.

The deal's fate had hung in the balance for hours as House conservatives threatened the compromise by seeking to add spending reductions to a version passed by the Senate in the early hours of 2013.

In the end, the House voted 257 votes to 167 to pass the original bill, with Democrats joining a smaller band of Republicans to pass the legislation after a fiercely contested and unusual session on New Year's Day.

Obama, who campaigned for re-election on a platform of building a more equitable economic system, declared the deal was a promise kept before flying back to Hawaii to rejoin his interrupted family vacation.

“I will sign a law that raises taxes on the wealthiest two per cent of Americans while preventing a middle class tax hike that could have sent the economy back into recession,” Obama told reporters after the vote.

Had the deal fallen apart, all Americans would have been hit by tax increases and spending cuts would have kicked in across government – a combined $500 billion shock that could have rocked the fragile recovery.

Relief was felt internationally and markets surged, although China's official news agency Xinhua warned: “People, or governments, can overspend for some time, but they simply cannot live on borrowed prosperity forever.”

The political feuding over the Christmas and New Year holidays reflected the near impossibility in forging compromise in a divided Washington.

It was also a signal that Obama, despite a thumping re-election win in November, may find it tough to achieve second term legislative goals that include immigration reform, clean energy legislation and gun control.

The truce in Washington is likely to be brief, given the fight that will ensue over the spending cuts that now loom at the end of February as well as over regular budget bill extensions.

Those fights will be paralleled by one over a request by Obama for Congress to lift the country's $16 trillion borrowing limit. Republicans are already demanding concessions on expenditures in return for allowing it to rise.

“More remains to be done to put US public finances back on a sustainable path without harming the still fragile recovery,” warned Gerry Rice, a spokesman for the International Monetary Fund.

“Specifically, a comprehensive plan that ensures both higher revenues and containment of entitlement spending over the medium term should be approved as soon as possible.”

Additionally, he said, “it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills.”