CORRECTED - UPDATE 1-Obama's deficit woes linger despite new number

(Corrects first bullet point to billion from million)

* New estimate cuts $250 billion from deficit

* Stronger financial system eases budget projection

* Worries about deficit cloud healthcare reform debate

(adds former CBO director's comments, background)

By Jeff Mason

WASHINGTON, Aug 20 (Reuters) - A stabilizing U.S. financial sector has freed President Barack Obama to trim 2009 budget deficit projections -- but the still-record-breaking figure will not make it any easier for him to sell healthcare reform.

The White House budget office will lower its deficit forecast next week for the current fiscal year to $1.58 trillion from $1.84 trillion after removing $250 billion set aside for bank bailouts, officials said.

The decision shows the administration has enough confidence in the financial sector's strength to forego an option to ask the U.S. Congress for further rescue funds.

But the lower figure's release, which comes at a convenient time for Obama as he tries to overcome critics' concerns about a nearly $1 trillion overhaul of the healthcare system, does not change a key problem: the deficit is still in the trillions of dollars.

"The size of the deficit remains large and most Americans will see it that way," said Julian Zelizer, a history professor at Princeton University.

"In this case, the devil is not in the details but rather it is in the trillion dollar figure."

The Congressional Budget Office will offer its latest deficit projections on Tuesday, setting up a potential clash of fiscal outlooks. Previous CBO estimates showed the deficit topping $1.8 trillion in 2009, largely because of Obama's $787 billion economic stimulus package.

In May, the White House pushed up its budget deficit estimates for the fiscal year ending Sept. 30 to $1.84 trillion -- representing a huge 12.9 percent of gross domestic product.

The latest number of $1.58 trillion, which represents 11.2 percent of GDP, still marks the highest deficit as a percentage of GDP since 1945.

Obama, a Democrat, has pledged to halve the deficit by the end of his four-year term and is eager to remind constituents that he inherited a $1.3 trillion budget hole from his Republican predecessor, George W. Bush.

Audiences at town hall-style meetings often boo when Obama emphasizes that fact and critics have gained traction by arguing that expensive plans to revamp healthcare, improve education and alter U.S. energy usage do not mix well with budget shortfalls.

CHALLENGES LOOM

An improving economy may offset some of those worries, and Obama officials are likely to paint the removal of the bank rescue provisions as more evidence that things are headed in the right direction.

Not everyone sees it that way.

Rudolph Penner, a former director of the CBO and now a fellow at the Urban Institute, which analyzes economic issues, said U.S. debt was headed to hit 80 percent of GDP by 2019.

"The administration so far hasn't shown any signs of trying to get the long-run budget situation in order," he said. "What we have to do is change the long run trajectory of spending, and that's a very difficult thing to do."

Administration officials said spending in the 2009 fiscal year would total $3.653 trillion and revenues would be $2.074 trillion.

Nigel Gault, chief U.S. economist at the analysis and consulting firm IHS Global Insight, said the new estimates reflected positive economic progress, but the deficit remained a looming problem.

"It's good news in the sense that it reflects a stabilizing economy and less troubled financial markets," Gault said of the latest projections.

"But the long-term issue remains: Can the administration implement a successful 'exit strategy' from huge deficits, especially after adding in the costs of healthcare reform?"

That question is on the minds of many Americans, who polls show are worried that higher taxes will ensue if the budget deficit does not fall.

Meanwhile, progress or not, the U.S. economy still has a far way to go before it can be described as healthy again, and that process could alter budget plans going forward.

"The biggest driver in a budget right now is the state of the economy," White House spokesman Robert Gibbs said earlier this week. "I don't think there's any doubt the challenges remain to get our fiscal house in order."

(Editing by Vicki Allen)