UPDATE 2-Clinton says U.S. deficit now a security issue

* Clinton blames Greenspan for debt crisis

* Clinton defends State Dept. budget increase

* Wishes could 'turn back clock' on U.S. financial policy

(adds China holdings of Treasury bonds, paragraph 10)

By Andrew Quinn

WASHINGTON, Feb 25 Secretary of State Hillary Clinton on Thursday said "outrageous" advice from former Federal Reserve Chairman Alan Greenspan helped create record U.S. budget deficits that put national security at risk.

Appearing before congressional panels to defend the State Department's $52.8 billion budget request for 2011, Clinton said the massive U.S. foreign debt had sapped U.S. strength around the world.

"It breaks my heart that 10 years ago we had a balanced budget, that we were on the way of paying down the debt of the United States of America," Clinton said.

"I served on the budget committee in the Senate, and I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan came and justified increasing spending and cutting taxes, saying that we didn't really need to pay down the debt -- outrageous in my view," she said.

Though she did not give a date, that hearing must have taken place during the presidency of George W. Bush, who authored a massive tax cut while spending billions on wars in Iraq and Afghanistan and sponsoring a major expansion of the Medicare health program for seniors.

Clinton urged lawmakers to tackle the federal budget deficit, which reached a record $1.4 trillion for the fiscal year that ended last September.

"We have to address this deficit and the debt of the United States as a matter of national security not only as a matter of economics," Clinton said. "I do not like to be in a position where the United States is a debtor nation to the extent that we are."

Having to rely on foreign creditors hit "our ability to protect our security, to manage difficult problems and to show the leadership that we deserve," she said.

"The moment of reckoning cannot be put off forever," she said. "I really honestly wish I could turn the clock back."

Though she did not mention it, China's portfolio of some $755 billion in U.S. Treasury bonds has become a concern for some U.S. policymakers. They worry that Beijing's creditor status could create leverage to influence U.S. policy.

FALL OF THE ORACLE

Clinton's swipe at Greenspan symbolized the way the former central bank chief's reputation has fallen since he left the job in 2006.

First named to the office by President Ronald Reagan in 1987, Greenspan served throughout the presidency of Clinton's husband, former President Bill Clinton. He was regarded as economic oracle whose cryptic pronouncements were searched for inner meaning and regularly moved financial markets.

Now, he has become a handy whipping boy blamed for helping inflate a housing bubble that eventually burst, setting off a grave financial crisis and plunging the economy into the worst recession in decades.

Greenspan, known as a deficit hawk, late last year endorsed a proposed bipartisan commission to help make tough calls needed to bring U.S. debt under control.

Clinton noted that the 2011 budget request for the State Department and the U.S. Agency for International Development represented a $4.9 billion increase over 2010, most of which would fund work in the "frontline states" of Iraq, Pakistan and Afghanistan.

"We are now assuming so many of the post-conflict responsibilities, and that is the bulk of our increase," Clinton said.

Republican Representative Ron Paul, who has helped lead congressional efforts to rein in the deficit, pressed Clinton on U.S. diplomatic spending including a plan for an expensive new U.S. embassy building in London

Clinton said the costs of the proposed modernist glass cube would be offset by savings on rent for satellite offices that embassy personnel must now use. "I believe I can make the case that we're not asking for new money," she said.

(reporting by Andrew Quinn, editing by Alan Elsner)