* Expiration would cost workers on average $1,000 a year
* Seniors' lobby group AARP opposes extending tax cut
WASHINGTON, Nov 15 (Reuters) - Support is quietly mounting in the U.S. Congress to extend the payroll tax holiday for 160 million Americans or to replace it with a similar break to protect American workers from an immediate hit in their take-home pay at the beginning of next year, according to lawmakers.
The payroll tax holiday, now in its second year, has been providing workers with an average of about $1,000 a year in extra cash.
It is set to expire on Dec. 31 as part of about $500 billion in tax cuts and another $100 billion in automatic budget cuts that comprise the so-called fiscal cliff.
While keeping the holiday would somewhat reduce the recessionary impact of the cliff, significant divisions remain on the payroll tax question in part because it funds the Social Security retirement program.
An alternative that would provide an equivalent amount of money to workers as a kind of stimulus measure is under active consideration.
Whether either becomes a reality is a matter for the fiscal cliff negotiations that start on Friday when Republican and Democratic congressional leaders meet with President Barack Obama at the White House.
Democratic Senator Kent Conrad told Reuters that extending the payroll tax cut would have "the biggest bang for the buck on economic growth."
"We need to do something on stimulus as part of the overall fiscal cliff. We have to do something because the economy's not growing fast enough," said Charles Schumer, one of the Democratic leaders in the Senate.
Max Baucus, chairman of the Senate Finance Committee, told reporters that the payroll tax cut extension needs to be "on the table," in any discussions over resolving the fiscal cliff.
Republican Senator Rob Portman agreed that the tax cut had to be part of fiscal talks, and Democratic Representative Chris Van Hollen has long said the tax break would help the economy.
The payroll tax is set to climb 2 percentage points to its previous 6.2 percent rate at the end of the year.
The Obama administration has been adamant about not extending the tax break for the third year in a row.
Influential seniors' lobby group AARP is fretting that Democrats will go back on their word.
The group, which is aligned with Democrats on preserving major government benefit programs, has been pressuring lawmakers not to compromise the health of the retirement fund by extending the tax cut and including Social Security in the debt reduction talks.
"Further extension of the payroll tax holiday would undermine confidence in Social Security and put at risk the program's dedicated funding stream and the hard-earned benefits of millions of Americans and their families," AARP said in an October letter to lawmakers and the White House.
But with the U.S. economy still shaky, Democratic lawmakers are starting to agree that this tax break is needed to help the economic recovery. Being a tax cut, it could be good point of leverage with Republicans.