* Obama supports moving provision in law to 2014 from 2017
* Governors give cautious praise to his proposal
WASHINGTON, Feb 28 (Reuters) - President Barack Obama extended an olive branch on Monday to U.S. states struggling to implement his healthcare law, offering support for a proposal that would give them some flexibility in carrying out its key parts.
Obama's signature healthcare reform plan aims to lower costs and extend coverage to millions of uninsured Americans, but the controversial law has divided Democrats and Republicans and handed states -- more than half of which are suing over its constitutionality -- a handful of bureaucratic challenges.
The president acknowledged those challenges on Monday during a meeting with state governors at the White House.
He highlighted a part of the law that would allow states to tailor their own solutions to healthcare reform in 2017 if they fulfilled the same goals as his reform push and said he supported a measure put forward in Congress to move that date up to 2014.
"If your state can create a plan that covers as many people as affordably and comprehensively as the Affordable Care Act does -- without increasing the deficit -- you can implement that plan," Obama told the governors.
"And we'll work with you to do it," he said.
States are charged with carrying out many of the reforms, including establishing exchanges where individuals can buy health insurance.
The plan made more people eligible for Medicaid, the healthcare program for the poor that states operate with partial reimbursements from the federal government. When states balked at the huge price tag of larger Medicaid rolls, Congress agreed to pay 100 percent of the costs for new enrollees.
Even with that concession, though, many states have been worried they cannot afford to implement the plan after the financial crisis and recession induced an historic collapse in many states' revenues. And Medicaid costs are rising as large numbers of laid-off workers turn to it for assistance.
Medicaid on average takes up a third of states' budgets. At the meeting, Obama asked the governors to create a bipartisan commission to study ways to bring down its costs.
Senator Orrin Hatch, the most powerful Republican on the Senate Finance Committee, called the president's announcement a public relations stunt.
"States don't need more press releases and talking points, they need action from Washington to reduce the burdens of this disastrous law," he said.
POLITICS, HEALTHCARE DIVIDE
The White House announcement was the latest push by the federal government to show sympathy for states' concerns. Last week, the Health and Human Services Department announced a variety of grant programs to help fund state programs to review health insurance rates, pay for the administration of insurance regulation, and provide home healthcare to Medicaid enrollees.
Obama singled out former Massachusetts Governor Mitt Romney, a likely contender for the 2012 Republican presidential nomination, when talking about state reforms.
"I know that many of you have asked for flexibility for your states under this law," Obama told the governors.
"In fact, I agree with Mitt Romney, who recently said he's proud of what he accomplished on healthcare in Massachusetts and supports giving states the power to determine their own healthcare solutions. He's right."
Obama's comments may complicate Republicans' efforts to differentiate between the reform Romney instituted as governor and the overhaul enacted by Obama that is reviled by many party leaders, who derisively call it "Obamacare."
More than half of the 50 states are suing to stop the plan in federal court, saying it usurps individuals' and states' rights.
Republican governors from states challenging the law, such as Mississippi's Haley Barbour, another possible presidential candidate, embraced Obama's proposal of flexibility but maintained their overall opposition to the law.
Kansas Governor Sam Brownback, a Republican and former U.S. senator, said that the proposal is "a positive thing" but it did not change his overall opposition to the law.
"We will implement what we are required to do. We're going to fight against it every bit of chance that we can," Brownback told reporters after the White House meeting.
(Editing by Philip Barbara)