(Updates with planned Senate vote on House plan)
By David Lawder
WASHINGTON, July 31 (Reuters) - With time running out to avert cutbacks in federal transportation money due to start on Friday, Democratic leaders in the U.S. Senate agreed to accept a Republican plan to extend funding for highway and transit construction through May 2015.
Senate Majority Harry Reid said he would put the House of Representatives' $10.9 billion funding plan to a vote on Thursday evening after the House rejected a shorter, $8.1 billion extension passed by the Senate.
The legislative ping-pong has heightened uncertainty over the dwindling Highway Trust Fund as Congress prepares to start a five-week summer recess this weekend.
The Department of Transportation has said it will start on Friday reducing payments to states by as much as 30 percent from the dwindling Highway Trust Fund.
Lawmakers and transportation officials say that failure to approve new funding would cause work slowdowns at the height of summer road construction season and halt planning for new projects, putting thousands of construction jobs at risk.
The Senate on Tuesday approved the shorter extension, lasting only through the end of 2014, because Democrats wanted to force Congress to act on a long-term funding plan during the post-election, lame duck session of Congress in November.
But in a vote that Democratic aides said was engineered to "jam" the Senate just before the recess, the House earlier on Thursday rejected the Senate plan and sent back its original version. That left senators little choice but to take the House plan or face criticism for allowing the trust fund to be depleted.
Representative Peter DeFazio, a Democrat, complained that the Republican extension bill would discourage Congress from passing a multi-year transport funding plan until next year.
"We'll limp along until next May and there'll be incredible uncertainty about the next construction season," DeFazio said. "There won't be major new projects planned."
State transportation directors and business groups have been clamoring for a long-term solution that would eliminate uncertainty over the funding of road and rail transit projects that benefit the heavy construction industry and its suppliers, including Fluor Corp, Vulcan Materials, LaFarge SA and Caterpillar Inc.
The Highway Trust Fund has suffered chronic shortfalls in recent years as revenue from fuel taxes, unchanged since 1993, have failed to keep pace with rising construction costs and been hit by improved vehicle fuel economy. Some lawmakers have advocated a fuel tax increase and believe this may be easier to achieve after November's congressional elections.
The House funding plan relies heavily on a controversial revenue source known as "pension smoothing" - an accounting maneuver that allows companies to reduce near-term contributions to employee pensions, thus increasing taxable profits. (Reporting by David Lawder; Editing by Cynthia Osterman)