HARRISBURG - Although Gov. Rendell and legislative leaders were inching closer to striking a budget deal, all sides warned that any agreement they reach could blow up if Congress does not approve federal welfare and Medicaid funding for Pennsylvania.

"It would be back to ground zero," Rendell told reporters Thursday. "Everything goes. . . . Everything is subject to disaster."

His proposed budget relies on an $850 million federal infusion to help balance the budget and pay the state's federally mandated Medicaid obligations.

If that federal money is not forthcoming - and the latest signs from Congress were not encouraging - Rendell said Pennsylvania could be facing 20,000 or more layoffs.

He said that figure included not just state employees, but county and municipal workers as well as public school teachers.

Rendell called the scenario "Armageddon."

"At this point, we're having trouble making the cuts necessary to get agreement on our [$28.2 billion] budget - to put an additional $850 million in cuts is Armageddon," he said.

While the hoped-for $850 million figure seems a relatively small slice of a budget in the neighborhood of $28 billion, all involved in the negotiations agree that it is crucial. They point out that myriad cuts in spending have already been figured into the budget. To fill an additional $850 million gap, both Rendell and legislative leaders say, massive layoffs and reductions in state services would be necessary to make ends meet.

Late Thursday afternoon in Washington, the latest version of the federal funding measure - which Democrats have pared back to appease Republicans - did not get the votes needed to survive a GOP filibuster in the U.S. Senate.

Thirty states, including Pennsylvania, had been counting on the federal money to help balance budgets for the fiscal year beginning July 1. Without it, several governors have warned of layoffs in the tens of thousands.

Larry Smar, spokesman for U.S. Sen. Bob Casey, said Democrats were still intent on gaining GOP votes for the funding. "We're not going to give up on it," said Smar. "We're trying to find the magic key to the lock."

Prior to the vote, Rendell called the situation in Washington "crazier than Harrisburg."

He made the comments after emerging from a noon meeting with legislative leaders. The negotiators, he said, have been making progress, adding that the administration was now proposing spending slightly under $28.2 billion. His initial budget proposal in February was for $29 billion.

Anything less than $28.2 billion, Rendell argued, would leave the state unable to fulfill its obligations to Pennsylvanians. Among the key items he wants to increase: funding for public education.

To support the spending, he would impose taxes on natural-gas extraction as well as the sale of cigars and smokeless tobacco.

But Republicans who control the state Senate are seeking to spend roughly $400 million less - and they appear unwilling to budge.

"The $27.8 billion figure is the maximum we believe can be spent without incurring the necessity of new taxes or without invading funds," said Senate Majority Leader Dominic Pileggi (R., Delaware).

His caucus, together with the House Republicans, has insisted that any budget deal specify where cuts will come if the Medicaid-related $850 million - or even a portion of it - were not approved by Congress.

"It would be foolish to pass a spending plan that assumes we will get money that in fact we won't be getting," Pileggi said.

Rendell said he did not believe it was legal to do so, but Pileggi said the caucus' attorney has advised him and other Senate leaders that it was "perfectly appropriate."