President Barack Obama forecast the biggest U.S. deficit since World War Two in a budget on Thursday that urges a costly overhaul of the healthcare system and would spend billions to arrest the economy's freefall.

An eye-popping $1.75 trillion deficit for the 2009 fiscal year is projected in Obama's first budget. That is equal to 12.3 percent of U.S. gross domestic product -- the largest share since 1945 when the country ran a shortfall of 21.5 percent of GDP.

The budget was scheduled to be released at 11 a.m. EST but the White House released it early after details began to leak out in the news media.

In 2010, the deficit would dip to a still-huge $1.17 trillion, but Obama promised to get the red ink under control within a few years through a combination of tax increases and spending cuts.

While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring fiscal discipline that we can produce sustained growth and shared prosperity, Obama said at the White House.

The proposed $3.55 trillion spending plan for the 2010 fiscal year that begins October 1 provides the broad outlines of a more detailed one to be released in April.

The soaring deficit figure sent U.S. Treasury bond prices lower and yields up to three week highs on Thursday.

Gold prices slid to their lowest level in more than a week, after testing all time highs over $1,000 an ounce earlier this month. Stock prices rose.

The budget requires passage by Congress to take effect.

While Obama, a Democrat, has broad support with both chambers in Congress controlled by his party, he could face a fight as the sticker shock of huge deficits lead to wariness about more spending for goals such as the healthcare overhaul.

FEDERAL SPENDING SOARING

Federal spending is skyrocketing as officials try to jolt the recession-hit economy with public-works spending and tax cuts and bail out the troubled financial industry.

The deficit number reinforced concerns the government will need to sell record amounts of debt to pay for programs aimed at pulling the economy out of a deep recession.

The budget issue is definitely one for Treasuries because it means greater funding going forward, it means that there is going to be a lot of supply that has to be taken on board by the market, said Orlando Green, fixed income strategist at Calyon in London.

Obama, who took office on January 20, has pledged to slash the deficit he inherited from former Republican President George W. Bush in coming years, bringing it down to $533 billion, or 3 percent of GDP by 2013.

Higher taxes on wealthier Americans and a planned drawdown of U.S. troops from Iraq are expected to help rein in the shortfall.

Obama is seeking an additional $75.5 billion for wars in Iraq and Afghanistan for the rest of the current fiscal year.

He is requesting $130 billion for military operations in the two wars for 2010, which would be down from the roughly $140 billion he expects will be needed this year.

Washington spent about $190 billion on the wars in 2008. Obama looks likely to order U.S. combat troops to withdraw from Iraq over about 18 months, according to U.S. officials. At the same time, he is ramping up the U.S. military effort in Afghanistan.

Obama's budget proposal lays out spending cuts in farm subsidies and other areas to meet the deficit-reduction goal.

But spending would increase to meet key objectives.

The budget sets aside $250 billion as a placeholder if Obama decides to ask Congress for more money in the current 2009 fiscal year to help the ailing U.S. financial system. No such decision has been made yet, officials said in a briefing with reporters on Wednesday.

The officials said that if the government were to spend $250 billion to inject money into the banking system, that would finance about $750 billion in asset purchases.

HEALTHCARE OVERHAUL

Meanwhile, Obama has signaled he has no intention of delaying his campaign promise of expanding healthcare to the 46 million people who are uninsured in the United States

The budget includes a 10-year, $634 billion reserve fund to help pay for the president's proposed healthcare reforms.

The budget includes billions in revenues, starting in 2012, from a greenhouse gas emissions trading system, one of Obama's key proposals to fight global warming.

The $1.75 trillion budget deficit forecast for this year reflects shortfalls accumulated under Bush as well as new spending proposals under the $787 billion economic stimulus package the Democratic president signed earlier this month.

While Obama remains highly popular with Americans, his stimulus package and other efforts to revitalize the economy have done little to win over Wall Street.

U.S. stocks prices hit 12-year lows this week.

The United States has experienced 14 months of recession triggered by a financial crisis that has spread across the world. Obama says a big increase in government spending is crucial to avoid economic catastrophe.

Obama's hopes for finding big savings in programs like farm subsidies may prove optimistic. Such programs tend to be popular with lawmakers from states with big agricultural sectors.

(Additional reporting by Jeremy Pelofsky and Emily Kaiser in Washington and Leah Schnurr in New York, editing by Frances Kerry)

George W. Bush Afghanistan Iraq Barack obama