The United States racked up a $165.04 billion budget deficit during July, 8.7 percent below the year-ago gap as economic stimulus and bailout spending subsided from peak levels, the Treasury Department said on Wednesday.

So far in the first 10 months of fiscal 2010, which ends on September 30, the shortfall between the government's income and its spending totaled $1.169 trillion, smaller than last year's record 10-month deficit of $1.267 trillion.

Late last month, the Obama administration trimmed its full year fiscal 2010 deficit forecast by $84 billion to $1.471 trillion -- a level that still represents a record. And in a sign that deficits will remain stubbornly high for some time, the White House raised its fiscal 2011 deficit forecast by $149 billion to $1.42 trillion.

July's deficit marked a 22nd straight month of red ink for the U.S. government, the longest string on record, due to heavy spending aimed at pushing the economy out of a prolonged slump, coupled with weak tax revenues.

The latest data kind of shows the modest improving trend we've seen this year -- a decline in TARP spending and a little bit of help on the revenue front, said Kim Rupert, head of fixed income analysis at Action Economics LLC in San Francisco. Whether it is sustainable is largely dependent on how the economy goes.

July is typically a deficit month, with the Treasury reporting only two July surpluses in the past 56 years, in 2000 and 2001. The July 2009 deficit of $180.68 billion was the largest ever for that month.

The Treasury said spending outlays for July 2010 fell 3.5 percent to $320.59 billion from $332.16 billion in July 2009, which was a record for any month. A Treasury official attributed the decline largely to lower spending on economic stimulus programs and the Troubled Asset Relief Program.

Meanwhile, receipts rose 2.7 percent to $155.55 billion from $151.48 billion a year earlier, due to higher corporate income tax collections and higher Federal Reserve earnings on investment securities. Individual income tax collections declined slightly.

(Reporting by David Lawder; Editing by Chizu Nomiyama)