* Measure includes tighter sanctions on Iran, new cyber security moves
* Pentagon would have base budget of $527.5 billion
* $88.5 billion planned for Afghanistan war, other overseas operations
By David Alexander
WASHINGTON, Dec 18 (Reuters) - U.S. lawmakers merged the competing House and Senate versions of the annual defense policy bill on Tuesday, approving a measure that authorizes $633.3 billion in defense spending for 2013, expands U.S. sanctions on Iran and strikes restrictions on biofuel use.
The legislation passed by a conference committee of lawmakers from both chambers is expected to go to the full Senate and House of Representatives for a final vote this week before being sent to President Barack Obama for his signature.
The measure authorizes a Pentagon base budget of $527.5 billion plus $88.5 billion for overseas operations, primarily the war in Afghanistan, the House Armed Services Committee said in a statement. The base spending includes some $17.4 billion for defense-related Department of Energy nuclear programs.
The bill - the National Defense Authorization Act - sets defense policies and has been passed annually for 50 consecutive years. Although it authorizes spending levels, it does not actually commit funds. That is done by the appropriations committees in both chambers in a separate piece of legislation.
The proposed base budget was $1.7 billion above Obama’s request for defense spending in the 2013 fiscal year that began in October, the House Armed Services Committee statement said.
The measure is making its way through Congress at a time when the Pentagon is having to trim $487 billion in spending over a decade and is facing another $500 billion in projected spending cuts over the same period beginning Jan. 2 unless lawmakers agree to an alternative before then.
Obama and Congress are struggling to cut more than a trillion dollars in government spending by Jan. 2 in an effort to slow the growth of the massive U.S. debt. If they fail to reach a deal, the government will be hit by $1.2 trillion in automatic, across-the-board cuts.
Defense Secretary Leon Panetta urged lawmakers on Tuesday to agree on a deal to avert the cuts and expressed concern about their efforts to use the authorization bill to divert funding to pet projects that the Pentagon has cut back.
He said the Pentagon had been working with the House and Senate on the authorization bill in the conference committee because legislation initially passed by the two chambers would have needlessly diverted “$74 billion over the next decade into programs, equipment and activities we don’t want or need.”
“We must make every dollar count,” Panetta said in a speech to the National Press Club. “We must continue to carefully manage the balance between sustaining current operations, being ready to respond to crisis and emerging threats, preparing for future operations and investing in capabilities for the future.”
The merged version of the bill passed by the conference committee on Tuesday includes a 1.7 percent pay increase for troops. It also rejected an administration proposal to increase fees on the health insurance program for military retirees.
Analysts have pointed to personnel costs as one of the drivers of rising military expenditures, and they have noted that military healthcare costs are increasing at an unsustainable rate, just as they are in the civilian sector.
Army General Martin Dempsey, who as chairman of the Joint Chiefs of Staff is the top U.S. military officer, told troops in Stuttgart, Germany, on Tuesday the Pentagon was exploring ways to rein in the growth of personnel costs.
“Our manpower costs in ... the whole Department of Defense budget are about 45 percent,” he told a town hall gathering. “If we breach 50 percent, we will throw the system out of bounds. It will mean that manpower costs are drawing a disproportionate and infeasible amount of the budget and that something will have to give -- end strength (and) modernization most notably.”
The authorization bill approved by the conference committee also assigns an additional 1,000 Marines to embassy and consulate security in the wake of the attack on the consulate in Benghazi, Libya, that killed U.S. Ambassador Christopher Stevens.
The bill also includes expanded sanctions against Iran over its nuclear program, said Senator Carl Levin, chairman of the Senate Armed Services Committee.
“The sanctions that we adopted are very, very strong sanctions,” he told reporters. “We designate the people and the port and energy and shipping areas in Iran as entities of proliferation concern.”
Levin said the panel rejected administration requests to broaden the exceptions to the sanctions, but he said the legislation would give the administration more time to implement the measures.
The bill would also:
-- Eliminate a House effort to prevent the military from buying biofuels that are more expensive than traditional petroleum. The military has been paying high prices for biofuels for testing purposes but has said it would not buy large quantities until prices are competitive with traditional fuel.
-- Require the Defense Department to do environmental impact tests on potential sites for an East Coast missile defense system. The legislation would not mandate deployment of an East Coast missile defense or require an operational deployment plan.
-- Increase cyber security by requiring companies doing business with the Defense Department to report to the Pentagon whenever cyber intruders breach their sensitive information systems.
-- Ease export restrictions on satellite technology in an effort to improve U.S. competitiveness in the sale of the equipment overseas. Representative Adam Smith, the top Democrat on the House Armed Services Committee, said limits on the export threatened to undermine the ability of U.S. firms to provide cutting edge technologies needed by the U.S. military.