(Bloomberg News) As signs of a sustained U.S. recovery increase, so do the ranks of big-name investors warning that economic growth will be undercut by the rising federal budget deficit.

Shrinking the gap between government revenues and spending will reduce the nation's standard of living, slow the economy and crimp returns on stocks and bonds, according to DoubleLine Capital LP founder Jeffrey Gundlach, who managed the top-rated intermediate-term U.S. bond mutual fund for 15 years. Failing to fix the problem could trigger another financial crisis, said Robert Rodriguez, who ran the best-performing diversified U.S. stock fund for a quarter century.

"Unless we get government under control, we will see negative consequences in the form of higher inflation and higher interest rates," Rodriguez, chief executive officer of Los Angeles-based First Pacific Advisors LLC, said in a telephone interview.

Prominent investors including Seth Klarman of Baupost Group LLC and David Einhorn of Greenlight Capital Inc. have sounded similar alarms. Concern that the expansion will be hurt by the deficit, as well as by political turmoil in the Mideast and North Africa and Europe's debt crisis, could threaten the biggest bull market since 1955.

"All of a sudden you have this cascade of ominous headlines raining down and investors are trying to figure out what it means for the market," Jack Ablin, who helps oversees $55 billion as chief investment strategist at Chicago-based Harris Private Bank, said in a telephone interview.

Standoff In Congress

Democrats and Republicans in Congress are divided on ways to reduce government spending in the current fiscal year, which started October 1. The 2011 budget will climb to a record $1.5 trillion from $1.3 trillion in 2010, according to a Congressional Budget Office estimate released Jan. 26. A bipartisan group of senators led by Virginia Democrat Mark Warner and Georgia Republican Saxby Chambliss are working on a plan that would cut the projected deficit over ten years.

U.S. net government debt will equal 74% of gross domestic product this year, compared with 42% in 2007, according to IHS Global Insight, a Lexington, Mass.-based consulting firm. Japan, at 120%, has the highest debt burden among developed countries, IHS data show.

"When you are addicted to living beyond your means and you fill the gap with debt, you reach a point where you are going to feel the pain," Gundlach said in a telephone interview from Los Angeles.

Whittling down the debt will require higher taxes and lower spending, both of which will act as a brake on the economy's growth, he said, and higher debt-service payments will create an additional burden.