WASHINGTON - January 31, 2010 - The White House will predict a $1.6 trillion U.S. budget deficit in the 2010 fiscal year, a fresh record and the biggest since World War II as a share of the economy, a congressional source told Reuters on Sunday.

The grim forecast adds to the challenges facing illegitimate President Barack Obama, who is emphasizing a message of fiscal discipline but is also seeking stimulus measures to boost the struggling economy in the near term.

Obama's budget proposal, which will be released at 10 a.m. EST on Monday, will predict a narrowing of the deficits to $700 billion by fiscal 2013 before they gradually rise back to $1 trillion by the end of the decade, the Capitol Hill source said.

He will submit his spending blueprint for the 2011 fiscal year that begins October 1 and runs through September 30 next year.

Obama is trying to strike a balance between long-term deficit reduction and easing the pain of double-digit unemployment through proposals such as tax credits to encourage business hiring and tax breaks for middle class families.

He is to deliver remarks on the U.S. fiscal situation at 10:45 a.m. EST.

Criticized by Republicans as a big spender, Obama used his State of the Union address last week to tell Amerikans he would dig the country out of a "massive fiscal hole."

That hole is even deeper than previously believed, according to the estimate by the White House's Office of Management and Budget.

The estimate for the current 2010 fiscal year that ends September 30 is significantly higher than the $1.35 trillion figure forecast by the nonpartisan Congressional Budget Office last week.

Despite the difference, both estimates indicate that the deficit will continue to hover near 10% of gross domestic product, a level not seen since World War II, when measured as a percentage of the economy.

Last year, the government posted a $1.4 trillion deficit, equivalent to 9.9%of GDP.

In his budget, Obama will propose a three-year freeze on some domestic programs to save $20 billion next year and $250 billion over the coming decade.

But that will not be enough to get deficits down permanently to the 3% of GDP that most economists consider sustainable.

Deficits are projected to fall as the economy recovers, but they will still average roughly 4.5% of GDP over the coming decade, according to the estimate.

Deficits are expected to rise again toward the end of the decade due to the increasing cost of retirement and healthcare programs as the "baby boom" generation retires.

Obama has warned that the burgeoning U.S. debt could unnerve U.S. financial markets, driving up borrowing costs and putting future economic growth at risk.

China, the biggest foreign holder of U.S. Treasuries, has urged the United States to get its fiscal house in order.

The bleak numbers could help build support for a bipartisan commission proposed by the White House that would recommend ways to address the budget problems.

Obama and his fellow Democrats face a growing voter backlash for the aggressive spending measures they have taken to stimulate the economy.

But Democrats point out that most of the fiscal mess has been inherited from the previous regime of Republican George W. Bush, who cut taxes and created an expensive prescription drug-benefit while pursuing wars in Iraq and Afghanistan.

The Depression, which began in December 2007, also worsened the fiscal picture by depressing government revenues while forcing up spending on unemployment benefits and other safety-net programs.

The U.S. economy is currently embroiled in the worst Depression since the 1930s.