UPDATE 1-Clinton lags in cash, McCain may take public money

(Adds McCain preparing for public funding)

By Andy Sullivan

WASHINGTON, April 21 (Reuters) - Democrat Hillary Clinton's presidential campaign began April awash in red ink and trailing rival Barack Obama in the scramble for cash, campaign records show, while Republican John McCain signaled he may rely on public funding.

Documents filed late Sunday with the Federal Election Commission show Clinton raised $20.9 million in March, less than half the $42.8 million raised by Obama, as the two geared up for Tuesday's primary showdown in Pennsylvania.

Clinton's campaign said it had $8 million available at the start of the month for the ongoing state-by-state battle for the Democratic nomination, while Obama reported $51 million in the bank.

Clinton's campaign also reported $10.3 million in debt.

Opinion polls show Clinton is favored to win in Pennsylvania, widely seen as a must-win for her, but Obama's hefty war chest will likely allow him to continue to spend heavily in state contests beyond Pennsylvania.

Arizona Sen. McCain, who has clinched the Republican nomination, raised $15.4 million in March and ended the month with $11.6 million in the bank.

But his campaign gave back $3.2 million in contributions that had been earmarked for the general election, a sign that he might rely on $84 million in public funding for the final stretch of the race after the September nominating convention.

That could put him at a disadvantage to either Obama or Clinton, who are not expected to rely on public funds.

Obama, an Illinois senator who would be the first black president, has raised $235 million in his presidential bid. Clinton, a New York senator and former first lady who would be the first woman president, has raised a total of $175 million.

McCain, meanwhile, has raised $75 million.

"We're setting ourselves up to potentially take public financing," McCain spokesman Brian Rogers said. "We think that we'll have the funding necessary to compete and win in the general (election) no matter what."

STRONG FUND-RAISING

A defeat in Pennsylvania, or even a less-than-resounding victory, could increase pressure on Clinton to drop out of the race and allow the party to unify behind a candidate to take on McCain in the November election.

Clinton spokesman Jay Carson said the New York senator's fund-raising has been strong since the end of March, thanks in part to a benefit concert by pop star Elton John.

"Hillary will have the resources needed to compete and win because of the strength of her grass-roots support and the influx of hundreds of thousands of new donors," Carson said in an e-mail.

Roughly half of the campaign's debts are owed to companies headed by two senior advisors.

Polling firm Penn, Schoen & Berland, owed $4.6 million, is headed by Mark Penn, who served as chief strategist until he was forced to step aside last month.

Grunwald Communications, owed $530,000, is headed by Mandy Grunwald, who serves as the campaign's ad maker. (Additional reporting by Jeff Mason, editing by Philip Barbara) (To read more about the U.S. political campaign, visit Reuters "Tales from the Trail: 2008" online at blogs.reuters.com/trail08/)