President Bush began softening his demand for a capital gains tax cut yesterday while publicly threatening to make Democrats the villains if a budget agreement is not reached and massive cuts in government programs are imposed beginning next week.

"If and when the ax falls, the Democratic Congress knows that it will be held accountable, and I will take that message to every state in the Union," Bush warned.

His comments at a political luncheon in Ohio were in sharp contrast to weeks of bipartisanship on the issue and drew an immediate rebuke from House Speaker Thomas S. Foley (D-Wash.), who said Bush's remarks were "damaging" to the talks.

The president's apparent shift on the tax issue came after a morning meeting with Republican congressional leaders during which House Minority Leader Robert H. Michel (R-Ill.) asked him to consider "capital formation" proposals rather than the capital gains tax cut that he has adamantly pushed for over the 11 weeks of budget haggling. Following the White House meeting, Senate Minority Leader Robert J. Dole (R-Kan.) said Bush was willing to compromise on the tax cut issue.

Sources close to the budget talks said yesterday that while the White House "still prefers" the capital gains cut, the positions of the two GOP leaders in Congress "now makes that difficult." Within the last week, both Michel and Dole publicly suggested that Bush drop the capital gains tax cut proposal in an attempt to break the deadlock in the budget negotiations with Congress.

A senior administration official said, "At the end of the day, the president will give up capital gains if he gets decent enough spending cuts, enforcement discipline and some kind of capital formation element." One of the administration's objectives in the budget talks has been adoption of measures to encourage savings and other means to increase formation of pools of capital for investment.

Among the growth incentives discussed as alternatives to the capital gains cut are indexing of capital gains calculations to reflect inflation, research and development tax credits, tax breaks to encourage investment in inner-city areas, and a deduction for investments in new small businesses. But Democrats contend that even indexing would benefit the rich, who have most of the capital gains, and would have to be linked to a higher tax on such people.

As Bush was laying the partisan groundwork to blame the Democrats for the consequences of continued deadlock, administration officials and House Republicans moved to give the White House more leeway to choose what parts of government to keep running and what to stop should the Gramm-Rudman-Hollings law cuts begin to take effect Monday, the start of the new fiscal year.

The White House is considering invoking what officials described as the president's "inherent power" to protect the public safety to allow some services, such as air traffic control, to continue fully rather than absorb their share of the Gramm-Rudman-Hollings cuts. House Minority Whip Newt Gingrich (R-Ga.) and Rep. Bill Frenzel (R-Minn.) introduced legislation yesterday to give Bush such authority for seven days even if the White House claims it already has that power.

Previous presidents have claimed "inherent power" to keep vital government functions operating during earlier budget disputes when the government temporarily ran out of spending authority. Such a situation could arise Monday if Congress sustains a threatened Bush veto of a stopgap measure to provide temporary spending authority while the budget talks continue. But in addition to that situation, the White House is considering extending the "inherent power" claim to include power to alter the imposition of the across-the-board Gramm-Rudman-Hollings cuts, a move some Democrats yesterday suggested would be illegal.

In discussing what Bush might accept, Dole said in the morning, "He might be willing to look at alternatives in the growth area." When asked whether Bush had said he was prepared to take capital gains off the table, Dole said, "No, he didn't indicate that."

But a senior official said, "We're flexible. It depends on what you get . . . . We haven't got things on the spending side that would make us give up on growth incentives."

In his Akron speech, Bush said, "We're still waiting for the Congress to come up with enough real spending cuts -- cuts that are enforceable, not just another empty promise of future savings . . . . And we're still waiting for Congress to commit to meaningful budget process reform -- reform that builds real discipline into the budget process."

Using his harshest language to date, Bush lashed the Democrats for "holding up" an agreement and painted an apocalyptic picture of government in ruins should the budget cuts take effect next week. "A cutback of this scope is going to hit hard. And it's going to hit home," Bush said. "And it's going to hit many, many people."

Recounting the months of negotiations, Bush claimed he had "gone the extra mile" while the Democrats sought political advantage in delay.

"I made a concession demanded by the Democrat leaders to get Congress off dead center," he said. "And I put it all on the table. Even taxes. And I took a lot of political heat coming out of the Democratic Party and the Democratic leaders. They had a great bunch of joy out of all of that."

After "waiting in the wings," Bush said he is now prepared to take his message blaming the Democrats across the country. "I have a podium, too," he said. "I have a bully pulpit, too."

Democratic leaders were particularly stung by the president's contention that they had not come up with any proposals. "He is badly misinformed," said Senate Majority Leader George J. Mitchell (D-Maine). "The statement is untrue and the president's chief of staff, budget director and treasury secretary know it's untrue."

At a later speech in Chicago, Bush apologized "for misspeaking" and withdrew the remark. "I accept the fact that in private negotiations there have been such proposals," he said.

In fact, the negotiators traded proposals for nearly seven hours before breaking shortly after 2 a.m. yesterday.

They worked another four hours yesterday, while formulations for managing the Gramm-Rudman-Hollings cuts were debated at the White House. The administration has pointed to a decision by then-Attorney General Benjamin Civiletti in the Carter administration that concluded that a president had "inherent power" to protect the public health and safety regardless of legislation stating the executive branch cannot spend what Congress has not appropriated.

Civiletti's legal opinion was the basis for the Reagan administration's decision in 1981 to divide the government into those performing "essential services" and those performing non-essential services. The non-essential workers were sent home for a day at the beginning of the fiscal year in 1981 and 1982 when Congress temporarily stalled in passing a resolution to continue government spending.

Staff writer John E. Yang contributed to this report. Balz reported from Ohio.