US President Barack Obama has signed into law a massive tax package that frayed his relations with liberals, caused him to abandon a pledge not to extend tax cuts to the rich and heralded a new balance of power in Washington.

The agreement sets the stage for Obama's new relationship with Republicans who, from January, will have a majority in the House and will have narrowed the Democrats' Senate majority.

With the benefits of the package expiring in two years, the law also places taxes at the centre of the political debate ahead of the 2012 presidential elections.

Obama invited both Democrats and Republicans to the White House on Friday for the signing of the bill that will cost $858bn over two years.

"It's a good deal for the American people; this is progress and that's what they sent us here to achieve," Obama said as a rare bipartisan assembly of lawmakers looked on. Conspicuously absent were the two top congressional Democrats, House speaker Nancy Pelosi and Senate majority leader Harry Reid, a reflection of the divided sentiment about the bill in the Democratic caucus.

The bill was the result of a deal hashed out 11 days earlier to avert a scheduled New Year's Day tax increase and renew jobless benefits. To strike the bargain, Obama had to set aside his vow to extend tax cuts only to middle- and working-class Americans, and enact an estate tax that is more generous to the wealthy than he had sought. Failure to pass the bill would have resulted in tax hikes for most Americans, as cuts approved under the administration of former president George Bush were set to expire.

On Thursday, liberal House Democrats threatened to torpedo the bill. The House battled over the measure late into the night before passing it 277-148 at about midnight.