UPDATE 1-Obama sees progress toward bailout deal

WASHINGTON, Sept 26 (Reuters) - U.S. presidential candidate Barack Obama said on Friday that talks between lawmakers and the White House over a proposed $700 billion financial bailout were yielding progress and a deal is possible.

"I am optimistic that we can get something done. I think there is real progress being made, this morning and last night," the Democratic candidate said, a day after talks at the White House on the proposal broke down in acrimony.

Obama said that since the White House meeting, he has been speaking by phone with Treasury Secretary Henry Paulson, some top Democrats as well as several Republicans.

He said what seemed to be helping break the logjam was that Paulson has agreed to consider including some of the proposals offered by House of Representatives Republicans in a "menu of options."

"I think it was very important for the working group that had been in place before the White House meeting to reboot, I think somebody phrased it, and to sit down and continue to work," Obama told reporters.

"One of the things that I suggested yesterday was once the House Republicans identified some of their concerns and alternative proposals that they wanted considered ... to have Secretary Paulson figure out whether those items should be listed in a menu of options that are available to him for the rescue package," he said.

Obama spoke to reporters on his plane just prior to heading to Mississippi for the first of three debates he is holding with his Republican rival John McCain.

(Reporting by Caren Bohan; Editing by Bill Trott and Eric Beech)