UPDATE 1-Obama sets plan to spur jobs, without busting budget

* Speech on Tuesday will outline job policy plans

* White House says job creation top priority

* White House stresses importance of small business loans

* Plans include aid to states, infrastructure spending (Updates with Obama comments, comments from Congress.)

By Patricia Zengerle

WASHINGTON, Dec 7 (Reuters) - President Barack Obama will lay out policy proposals to combat double-digit unemployment in a speech on Tuesday tackling an economic problem that has become a political drain on his young administration.

Obama is considering plans including increased aid to states, pushing banks to make more loans to small businesses, infrastructure spending, incentives to homeowners to make their houses more energy efficient and possibly tax cuts for companies that add more workers, U.S. officials said.

The White House has not released any program specifics, but stresses that job creation is a top priority.

"Having gotten the financial crisis under control, having finally moved into a positive territory when it comes to economic growth, our biggest challenge now is making sure that job growth matches up with economic growth," Obama told reporters on Monday.

"What we've seen is that companies shed jobs very quickly, partly induced by panic over what was happening on Wall Street and they are still tentative about hiring back all those people who were laid off," he said after meeting with Turkish Prime Minister Tayyip Erdogan at the White House.

Despite signs that the economy is emerging from two years of recession, the U.S. unemployment rate remains at a stubbornly high 10 percent and Obama and his fellow Democrats would dearly love to bring it down well before the November 2010 congressional elections.

The speech, in Washington, is scheduled for Tuesday at 11:25 a.m. EST (1625 GMT).

Obama's proposals must win political support in Washington, but he also must avoid adding to a yawning budget deficit after his administration ran a staggering $1.4 trillion shortfall in fiscal 2009. It is likely to have a similar gap in the current fiscal year, ending on Sept. 30, 2010.

LIKELY TO USE TARP FUNDS

The White House said Obama was likely to discuss using money from the government's Troubled Asset Relief Program, or TARP, funds -- which were set aside to bail out crumbling financial institutions -- for highway construction, small business loans and other measures.

The administration has said it will use TARP money for deficit reduction but may also steer some to community banks to try to spur lending to small businesses in addition to using some of the funds to pay down debt.

"Small businesses and some medium-sized businesses are still feeling a huge credit crunch," Obama said. "They can not get the loans that they need to make capital investments that would allow them to then expand employment, so that's a particular area where we might be able to make a difference."

The administration insists the program Obama has in mind is not another economic stimulus package akin to the $787 billion bill he signed in February.

Republicans oppose dipping into TARP to finance job creation, saying the law creating the rescue fund said it should not be used for anything but the bank bailout.

Republican Senator Judd Gregg acknowledged Democrats could change the law to clear the way for new spending, but said: "It would be an obscene act of fiscal irresponsibility."

Senior Democratic aides on Capitol Hill said matters were fluid and it was unclear exactly what Obama would propose, how much it would cost and how he hopes to pay for it.

"My sense is that they (members of the administration) haven't yet made the final cuts" among a number of job-creation options, one aide said.

The administration is interested in hearing other ideas, White House Communications Director Dan Pfeiffer said on the White House blog.

"We don't think there is one silver bullet, one plan, one speech or a singular piece of legislation that alone will solve double-digit unemployment. And the President's speech will not represent the totality of our plans for continued economic recovery," he said.

(Additional reporting by Thomas Ferraro, editing by Cynthia Osterman)