WASHINGTON - President Barack Obama on Thursday urged corporate America to help tackle the nation's highest unemployment in 26 years but also hinted at federal tax credits and aid to states to ease jobless woes.

We cannot hang back and hope for the best when we've see the kinds of job losses that we've seen over the last year, Obama told business and labor leaders invited to the White House to brainstorm how to speed employment creation.

Obama hosted a jobs forum after U.S. unemployment hit a 26-year high of 10.2 percent in October, chipping away at his popularity and potentially shaping his political future.

Despite the progress we've made, many businesses are still skittish about hiring, he said, acknowledging that although growth has resumed, the labor market is lagging behind.

November's unemployment report is due on Friday and a Reuters poll of analysts expect the rate to show no change.

The numbers will provide a sobering backdrop for Obama as he travels to Allentown, Pennsylvania, to take his message into the U.S. heartland, capping a crucial week for the president who also announced a major escalation in the Afghan war.

Economic anxiety as the country struggles out of the worst recession in 70 years could thwart prospects for his Democratic Party in November congressional elections, and dim Obama's own prospects for a second term in office. Recent opinion polls show his approval ratings are down as the economy weighs and critics dismissed his White House forum as largely a public relations exercise.

Obama wants measures that will not add to the country's record budget deficit, effectively ruling out significantly more public spending on top of a $787 billion stimulus package that he signed in February.

But he said tax credits to encourage hiring -- an option popular with liberal economists that would not be free for the public purse -- was an idea I think is worthy of further consideration.

He also sounded open to providing additional aid to cash-strapped states to help them avoid laying off public workers like teachers and firefighters in order to balance their budgets, as most are required to do by law.

As tough as this financial crisis and recession has been on the federal budget, it has in some cases been worse on state and local budgets, Obama told the forum's closing session.

He reiterated that he would only consider responsible ideas that took account of the country's limited resources, and stressed the government could only do so much for the economy.

We don't have enough public dollars to fill the hole of private dollars that was created as a consequence of the crisis, he said, referring to the financial market meltdown last year that significantly intensified the recession.

(Additional reporting by Matt Spetalnick, Caren Bohan, Patricia Zengerle, Jeff Mason, Doug Palmer, John Poirier and Lucia Mutikani; Editing by Bill Trott)

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