Obama backs tax deal but pipeline now in doubt

WASHINGTON (Reuters) - President Barack Obama supports a compromise payroll tax deal reached in Congress on Friday but Republican insistence on including a demand to speed a decision on a controversial Canada-to-Texas oil pipeline means it almost certainly will not be built, a senior administration official said.

The Obama administration believes that while an agreement to extend payroll tax breaks for just two months is not ideal, it would be inconceivable that Republicans would consent to that and later refuse to renew the cuts for rest of the year.

The senior official said the deal, which still must be approved by the full Senate and House of Representatives, meets Obama's main concern that middle-class taxes not rise with the expiration of payroll tax breaks at the end of December.

But it falls short of Obama's original push for a full-year extension and also runs counter to an earlier White House demand that there be no link to the proposed Keystone XL pipeline.

The official made clear, however, that Obama had been more concerned about the economic damage to an already fragile economic recovery if tens of millions of families faced higher taxes with the coming of the new year.

The administration considers the Republicans' insistence on tying the pipeline review to the tax deal to be counterproductive to their own effort to get the $7 billion project fast-tracked as a potential jobs creator, the official said.

Obama stands by the State Department's warning on Monday that a Republican effort to limit the pipeline review to 60 days would violate environmental laws and force it to withhold approval, the senior official said.

In a bow to environmentalists' concerns, Obama directed the State Department last month to conduct an additional review of the pipeline. That would punt the decision on whether to approve the project until after next year's presidential election when he is seeking a second term.

The Democratic president can live with the Keystone clause in the tax deal because it does not mandate that he approve the pipeline, only that he make a decision within 60 days on whether or not to allow construction.

The official said the project would now almost surely be killed because Obama has made clear he will not give the go-ahead without time for an adequate review of the health, safety and environmental risks.

(Reporting by Matt Spetalnick; Editing by Bill Trott)