By NAFTALI BENDAVID and JANET HOOK

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The Senate late Thursday blocked competing Democratic and Republican proposals for extending the current payroll-tax break, but that could clear the way for the two parties to negotiate a broader deal on that and other crucial items by year end.

The Democratic bill extending the tax cut for an additional year, to have been funded by a surtax on those earning more than $1 million a year, won a 51-49 majority, short of the 60 needed for passage.

More surprising was the fate of the Republican version, to have been paid for by shrinking the federal workforce. It was blocked 20-78, with all Democrats and 26 Republicans voting no. Earlier this week, Senate Minority Leader Mitch McConnell (R., Ky.) had said most Senate Republicans favored extending the payroll-tax cut.

Democrats described the vote as an embarrassment for Mr. McConnell and said it strengthened their hand. GOP leaders played down the defections, saying it had been clear that many Senate Republicans were uncomfortable with the tax-cut extension. Both sides insisted an agreement to extend the tax holiday is still likely before it expires at year end.

The vote suggests a disconnect between Republican leaders of both houses, who fear the politics of allowing a tax increase to hit virtually all wage-earners on Jan. 1, and many rank-and-file Republicans, who say the payroll-tax cut doesn't create jobs and oppose short-term tweaks to the tax code.

Sen. Jerry Moran (R., Kan.) said his opposition to extending the tax holiday was due to the cost. "When are we going to admit that we are broke?" he said. "We are putting off difficult decisions and leaving it up to our children and grandchildren to pay for our irresponsibility."

House Republicans are set to meet Friday morning to decide how to proceed on the payroll-tax issues, and that session could reveal how deep the division is on the issue within the GOP in that chamber.

The payroll-tax cut is only one issue Congress must tackle by Dec. 31. Lawmakers also face pressure to extend unemployment benefits and adjust payments for doctors under Medicare, both of which face a year-end deadline. Congress also must act by Dec. 16 to continue funding the government.

Party leaders still hope they can wrap up the final items in short order. "I do believe there's enough common ground between where the White House and Democrats are and where Republicans are for us to move this legislation and to do so quickly," said House Speaker John Boehner (R., Ohio).

Workers this year have seen their payroll taxes cut to 4.2% of their salary from 6.2%. Democrats wanted to cut that further to 3.1% and extend the tax break to employers, paying for it with a 3.25% surtax on income above $1 million.

Republicans countered with a plan to extend the tax break and fund it by freezing the pay of federal workers and cutting the government workforce by 10% through attrition. That is the plan that failed to get a majority of GOP support Thursday.

Despite the setback, lawmakers see a path to compromise. One option is to pay for the payroll-tax cut with some of the spending cuts that the deficit-cutting supercommittee explored before it broke up, such as the sale of broadband spectrum and an increase in security fees on airline tickets.

That money could also help pay for other year-end items. During the recession, employment benefits have been extended to 99 weeks, and many lawmakers want to renew that program for another year. Congress also regularly adjusts the Medicare-payment formula so physicians don't see an abrupt decline in their fees.

"There are a bunch of different knobs on the control panel," said a Senate Democratic aide. "The good news is that usually this horse-trading doesn't start three weeks in advance. Now it's already starting."

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