The Obama administration warned on Friday the U.S. economy had encountered strong headwinds and the country's fiscal challenge remained grave, but it lowered an estimate for the budget deficit this year.

In broad terms, no major changes were made in the updated outlook for the country's fiscal path over the next decade for the country's deficits and debts, which the White House readily admit remain too high.

The economy is still struggling; too many Americans are still out of work; and the nation's long-term fiscal trajectory is unsustainable, the White House said in the annual midsession review of President Barack Obama's budget.

Americans are anxious about the deficit and could punish Obama's Democrats in November 2 midterm congressional elections for perceptions of big government spending and high unemployment after a severe U.S. recession.

The White House Office of Management and Budget trimmed an expected funding gap in the current fiscal year by $84 billion to $1.47 trillion, compared with the estimate released in February. This deficit was expected to decline in 2011 to $1.42 trillion, although this amount was $150 billion higher than initially forecast.

The U.S. economy still faces strong headwinds, the White House said, citing a weak housing market and doubts about the recovery in Europe, which could sap demand for exports.

The European recovery is at risk because of increased uncertainty while government stimulus is withdrawn, and a further slowdown in Europe would pose problems for the rest of the world whose exports to Europe may be reduced, the White House said.

(Reporting by Alister Bull, Editing by Neil Stempleman)

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