UPDATE 1-Bailout will require tough choices-candidates

By Jeff Mason

OXFORD, Miss., Sept 26 (Reuters) - A huge financial market bailout package will require the next president to make tough choices and pare back government spending, the two U.S. presidential candidates said on Friday.

"There is no doubt it's going to affect our budget," Democrat Barack Obama said during a debate with his Republican rival John McCain, referring to a planned $700 billion rescue for the troubled financial industry.

The two men faced off in the first of three presidential debates one day after attending an acrimonious White House meeting that failed to unite Democrats and Republicans behind a single plan for solving the crisis.

But Obama and McCain expressed hope there would be a deal soon on a rescue package to save the U.S. economy from its worst financial crisis since the Great Depression.

"I'm feeling a little better tonight, and I'll tell you why. Because as we're here tonight in this debate, we are seeing, for the first time in a long time, Republicans and Democrats together, sitting down, trying to work out a solution to this fiscal crisis that we're in," McCain said.

Despite the difficulties, "I am optimistic about the capacity of us to come together with a plan," Obama said. "We have to move swiftly and we have to move wisely."

Obama said the Wall Street financial crisis was the "final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain."

Both men stressed a rescue package was needed because of the threat the financial turmoil posed to the economy and the need for strict oversight of how the money is spent to make sure it does not pad the pockets of Wall Street executives.

"We're talking about failures on Main Street, and people who will lose their jobs, and their credits, and their homes, if we don't fix the greatest fiscal crisis, probably in -- certainly in our time, and I've been around a little while," McCain said.

One option for dealing with the cost of the bailout would be to put "a spending freeze on everything but defense, veteran affairs and entitlement programs," McCain said.

McCain also suggested eliminating ethanol subsidies and doing away with "cost-plus" defense contracts, which he said have caused the cost of some defense systems to go "completely out of control."

Both the bailout, and lower tax revenues as a result of the slowing U.S. economy, would require "some tough decisions," Obama said. "The problem with a spending freeze is you're using a hatchet where you need a scalpel."

Obama said he still wanted to push ahead with health care reform and other big projects like achieving energy independence and rebuilding America's infrastructure, but some of that might have to be delayed.

"Let me tell you another place to look for some savings. We are currently spending $10 billion a month in Iraq when they have a $79 billion surplus. It seems to me that if we're going to be strong at home as well as strong abroad, that we have to look at bringing that war to a close," Obama said.

(Writing by Doug Palmer, editing by David Alexander)