UPDATE 3-U.S. House approves "clean" debt limit after Republicans drop demands
* Latest Republican demand on debt limit collapses as conservatives balk
* Boehner: borrowing increase must rely largely on Democratic votes
* Lack of unity hampers Republican strategy on fiscal issues
By David Lawder and Richard Cowan
WASHINGTON, Feb 11 (Reuters) - The U.S. House of Representatives narrowly approved a one-year extension of federal borrowing authority on Tuesday after Republicans caved into President Barack Obama's demands to allow a debt limit increase without any conditions.
The 221-201 vote, carried mainly by Democrats, marked a dramatic shift from the confrontational fiscal tactics House Republicans have used over the past three years, culminating in last October's 16-day government shutdown.
It came after House Republicans repudiated House Speaker John Boehner's latest plan to link an increase in the $17.2 trillion borrowing cap to a repeal of planned cuts to military pensions.
Although Boehner called his decision to advance a "clean" debt limit a "disappointing moment," it sets aside a difficult and divisive issue until after the 2014 congressional elections in November, allowing Republicans to focus their campaign efforts on the rocky launch of Obama's health care reform law.
Democrats provided most of the "yes" votes on the debt limit increase, which was hastily attached to a measure renaming an air traffic control center in Nashua, New Hampshire. There were 193 Democrats who voted yes, versus just 28 Republicans, who wanted to pin blame on Obama's refusal to negotiate.
"He will not engage in our long-term spending problem," Boehner told reporters earlier on Tuesday. "So let his party give him the debt ceiling increase that he wants."
The Democratic-controlled Senate was likely to begin consideration of the measure on Wednesday. Senate passage this week would buy financial markets considerable breathing room ahead of Feb. 27, when the U.S. Treasury expects to exhaust existing borrowing capacity, putting federal payments at risk.
Without an increase in the statutory debt limit, the U.S. government would soon default on some of its obligations and have to shut down some programs, a historic move that would likely cause market turmoil.
U.S. stocks reacted mildly to news of the Republican decision to drop any conditions on the debt limit. Wall Street stocks rose for a fourth session as traders focused most of their attention on Federal Reserve Chair Janet Yellen's first congressional testimony.
"It was a minor worry that an agreement wouldn't come. It's not a big plus (for the market) but I'm glad this happened," said John Manley, chief equity strategist at Wells Fargo Funds Management in New York.
As stocks rose, bond prices retreated.
Republicans used the debt limit with great effectiveness in 2011 to gain budget concessions, when a bitter stand-off led to a deal calling for $2.1 trillion in cuts to U.S. discretionary spending over a decade. The fight also cost the United States its top-tier credit rating from Standard & Poor's.
But the wrenching two-week government shutdown and debt limit battle last October sapped the party's enthusiasm for another major showdown.
Instead of seeking big cuts to the Social Security and Medicare benefit programs that Republicans blame for pushing up U.S. debt, Boehner floated more modest proposed concessions, such as ordering approval of the Canada-to-Texas Keystone XL oil pipe-line and changes to Obamacare insurance provisions.
But they too failed to gain enough Republican support to overcome objections from Democrats.
The final plan to repeal cost-of-living cuts for non-disabled military retirees was doomed from the start, lawmakers said, as many conservatives objected to linking veterans to the debt ceiling, to cost offsets and other issues. Many simply wanted the big deficit reduction achieved in the past.
"If there's something attached to the debt ceiling, it should be addressing the underlying problem, which is, we're spending too much money," said Representative Jim Jordan, a conservative Republican from Ohio.
The episode showed that Boehner still has difficulty exerting control over his fractious caucus, in which conservatives backed by the Tea Party movement hold considerable sway.
"Republicans can't unite behind one plan. And so as long as we do that, we'll not be influencing the outcomes of issues like this," said Republican Representative Kevin Brady of Texas.
Conservative groups that egged on Republicans in the October shutdown fight over Obamacare funding urged members to vote against the debt limit increase.
"Something is very wrong with House leadership, or with the Republican Party. This is not a bill that advocates of limited government should schedule or support," The Club for Growth said in a statement.
Some Republicans wanted the debt limit issue behind them so they can focus on more productive issues such as next year's annual spending bills and bashing Obama's health care law, which they have repeatedly tried to repeal.
"If you spend the money, you've got to pay the bill," said House Appropriations Committee Chairman Hal Rogers, who voted for the increase.
Republican House leaders led off a news conference on Tuesday with five lawmakers complaining about the latest Obamacare mandate delay for medium-sized companies.
In a somewhat cryptic sign that Boehner himself may be relieved to put the debt limit behind him, he walked out of the news conference singing the opening words to "Zip-A-Dee Doo-Dah," the marquee song from the 1946 Disney film "Song of the South."
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