President Barack Obama will propose on Tuesday using $30 billion from the TARP bank bailout program for a small business lending fund to try to spur job growth in a critical sector of the U.S. economy.

The program would be limited to smaller or community banks, those with $10 billion in assets or less, according to senior officials, who briefed reporters before the announcement.

Obama, who is under strong pressure to reduce the 10 percent U.S. jobless rate, was to outline the plan during a trip to Nashua, New Hampshire. He first mentioned the idea last week in his State of the Union speech.

The aim is to increase lending to credit-worthy small businesses. These businesses are responsible for the creation of new jobs but they have been hit particularly hard by the recession and tightening of credit, as banks show a reluctance to take risks.

These are the small, local banks that work most closely with our small businesses - that provide them their first loan, and watch them grow through good times and bad, Obama will say, according to speech excerpts released by the White House.

The more loans these banks provide to credit-worthy small businesses, the better a deal we'll give them on capital from this fund, he will say.

To spur lending, banks would be able to take capital at attractive terms that would become better as they increase their loans to small businesses.

For example, banks with $1 billion in assets or less could get up to 5 percent of risk-related capital, and pay a dividend rate of 5 percent. But the dividend rate could be as low as 1 percent if the banks were to increase small business lending by 10 percent, the officials said.

We think this incentive structure will help maximize the best bang for the buck, said a senior official, because the bank would be encouraged to loan the money rather than hold or hoard it.

The plan would be separate and distinct from the Troubled Asset Relief Program, and thus would encourage broader participation by banks as they would not face TARP restrictions, the officials said.

There are 8,000 banks with under $10 billion in assets that could participate in the program.

The new fund would have to be approved by Congress. The officials said preliminary discussions have been held with lawmakers and that they would like to create the program as quickly as possible.

The proposal was likely to meet opposition from Republican lawmakers, who want the TARP money returned to the U.S. Treasury.

(Reporting by Steve Holland; editing by Chris Wilson)

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