Despite last minute bipartisan meetings, the bill to fund the government until 16 February did not receive the required 60 votes.
It is the first shutdown ever to happen while the same party, the Republicans, controls Congress and the White House.
In response, the White House accused Democrats of holding “lawful citizens hostage over their reckless demands”.
“They put politics above our national security, military families, vulnerable children, and our country’s ability to serve all Americans”, spokeswoman Sarah Sanders said.
But Democratic Senate leader Chuck Schumer said President Donald Trump had turned down two bipartisan compromise deals and “did not press his party in Congress”.
It was unclear which way the vote would go as the midnight deadline approached, with Republicans and Democrats split on key issues.
The House of Representatives voted 230-197 on Thursday night to extend funding until next month, but the measure failed to pass the Senate by a margin of 50-49.
Five Republicans voted against the bill while five Democrats broke ranks to support it.
The last US shutdown happened in 2013 and lasted for 16 days, during which many federal employees took a forced leave of absence.
Many government offices will close as federal law requires agencies to shut down if Congress has not allocated money to fund them.
National parks and monuments are also likely to face closure.
But essential services will still run. These include national security, postal services, air traffic control, inpatient medical services, emergency outpatient medicine, disaster assistance, prisons, taxation and electricity generation.
In the hours before the vote, President Trump sounded pessimistic, tweeting that it was “not looking good for our great Military or Safety & Security on the very dangerous Southern Border”.
He invited Chuck Schumer, a fellow New Yorker, to the White House for last-ditch talks but they failed to find sufficient common ground.
Emerging about an hour later, Mr Schumer told reporters “some progress” had been made, but a “good number of disagreements” remained, including a difference in opinion regarding the Democrats’ desire to extend talks for another five days.
The main bone of contention has been Democrats’ demands for more than 700,000 undocumented immigrants who entered the US as children to be protected from deportation.
These “Dreamers”, as they are known, were granted temporary legal status under a programme established by former President Barack Obama.
In September, Mr Trump announced he was ending the programme and allowing Congress until March to come up with a replacement.
The Republican president and congressional conservatives have been using the issue as a bargaining chip in an attempt to wring concessions from Democrats.
Mr Trump wants funding for tough new border controls, including his proposed US-Mexico wall.
Republicans added a sweetener to the bill in the form of a six-year extension to a health insurance programme for children in lower-income families.
But Democrats want this programme extended permanently.
The legislative negotiations went up in flames last week after Mr Trump allegedly complained the US was letting in immigrants from certain “shithole countries”. (Courtesy BBC)