UPDATE 3-Growing deficits may threaten US Aaa rating-Moody's

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NEW YORK Feb 2 (Reuters) - The Obama administration's budget takes a small step toward sustainable debt levels but more is needed to preserve the country's Aaa rating, Moody's Investors Service said on Tuesday.

"The debt trajectory is clearly continuously upward if further measures are not implemented," Moody's senior credit officer Steven Hess said in a statement.

As interest rates rise and the size of the debt increases, "debt affordability will deteriorate in a major way," he said.

President Barack Obama on Monday projected the U.S. budget deficit would soar to a record in 2010 as he made tackling double-digit unemployment his immediate priority.

The budget for the fiscal year to Sept. 30, 2011, which must be approved by the U.S. Congress, forecasts a deficit of $1.56 trillion in 2010, equal to 10.6 percent of gross domestic product.

Obama is under pressure to convince rating agencies and investors he has a credible plan to control the deficit and debt over time. Voter discontent over the deficit and high unemployment could also translate to potentially big losses for Democrats in congressional elections in November.

Freezing part of discretionary spending for three years is a positive step for the U.S. debt rating, but "the deficits projected in the budget do not stabilize debt levels in relation to GDP, and the portion of government expenditures going to pay interest on the debt shows a steady rise," Hess said.

With unemployment still high, a big fiscal adjustment right now would be politically difficult and could slow the economic recovery, he said.

In addition, extra spending for job creation in the current fiscal year is adding to the long-term debt trajectory, Hess said.

Entitlement programs will also put pressure on the government's fiscal position toward the end of the decade and in following years, regardless of the new budget proposals, Moody's said.

"The administration itself, in the budget release, recognized that further measures were necessary by announcing its intention to establish a Fiscal Commission," Moody's said.

However, the commission's goal may be politically difficult because it will require further budget cuts or tax increases, the rating agency said. (Reporting by Dena Aubin; Editing by James Dalgleish, Dan Grebler and Diane Craft)