* Congress reaches deal on economic stimulus bill
* Negotiators trim price tag to $789 billion
* Votes in House, Senate possibly on Thursday
By Jeremy Pelofsky and Donna Smith
WASHINGTON, Feb 11 (Reuters) - U.S. congressional negotiators on Wednesday reached a deal on $789 billion in emergency spending and tax cuts, handing a big victory to President Barack Obama in his effort to pull the economy out of a steep tailspin.
Negotiators in the House of Representatives and Senate overcame an apparent last-minute snag on funding to help states plug growing budget deficits and money to renovate schools that Obama had sought.
The huge package is aimed at reversing a deep recession and news of the compromise sent U.S. stock markets higher. A majority of negotiators approved the deal, setting up votes in the House potentially on Thursday and possibly later that evening in the Senate but the timing could slip.
Obama, whose early hopes for strong bipartisan support for the strategy were crushed by Republicans who wanted more tax cuts instead of spending, said the deal would help save or create millions of jobs and "get our economy back on track."
The compromise stimulus package is "a plan that will provide immediate tax relief to families and businesses, while investing in priorities like health care, education, energy, and infrastructure that will grow our economy once more," he said in a statement.
Without a stimulus bill, Obama has said the country faces a possible economic "catastrophe." Some 3.6 million jobs have been shed since the recession began in December 2007.
Heavy equipment maker Caterpillar Inc would be able to to rehire some of its 20,000 laid-off workers if the stimulus package passed, Obama said.
About 36 percent of the package is geared toward tax cuts, with the rest in spending, according to a Senate aide.
The huge emergency spending will add to a federal budget deficit already spinning out of control. The Treasury Department said on Wednesday a $569 billion deficit was recorded just for the first four months of the fiscal year that began last Oct. 1, a record for that period.
Democrats control both chambers in Congress and fellow Democrat Obama has pushed them for a quick conclusion to the legislation in hopes it would begin to create and save up to 4 million jobs.
His stimulus plan has won little support from Republicans who argued it was merely expanding big government spending, underscoring the difficulty Obama has faced trying to bridge partisan divides after winning the November election.
In the Senate, passage of the bill has hinged on support from a handful of moderate Republicans. To address their concerns, negotiators in the House and Senate agreed to scale back earlier proposals for the package.
"The middle ground we've reached creates more jobs than the original Senate bill and spends less than the original House bill," Senate Majority Leader Harry Reid told reporters. Senators said it would create or save 3.5 million jobs.
Negotiators had worked around the clock to meld an $820 billion House bill with an $838 billion Senate measure, trying to meet a deadline set by Obama to produce a plan that he wants to sign into law by Monday.
WOOING REPUBLICAN SUPPORT
Democrats control 58 seats in the 100-seat Senate and need some Republican support to reach 60 votes and overcome any possible procedural hurdles.
"This unprecedented spending of taxpayer dollars is not timely, targeted nor temporary, and it fails to address the underlying problems with the economy," said Senate Minority Leader Mitch McConnell, the senior Senate Republican.
But McConnell told also told reporters that he did not think any Republican senators planned to delay passage of a bill and that is was time to "vote and move on."
Three moderate Republican senators, Susan Collins, Olympia Snowe and Arlen Specter, had demanded that the negotiators pare the bill to below $800 billion in exchange for their votes.
Collins said they had agreed on a $54 billion fund for states to help them plug growing budget deficits as well as to pay to modernize schools.
Originally the House had $79 billion allocated for states and $14 billion for school construction, while the Senate cut state money to $39 billion and stripped out its $16 billion for building schools.
Senators also said they trimmed tax incentives to encourage car and home sales, but details were not yet available.
At the suggestion of the White House, they also agreed to a somewhat smaller tax credit for workers that would now total $400 for individuals and $800 for couples. An earlier version of the bill would have granted $500 and $1,000 respectively.
Additionally, there was pressure to add more money to infrastructure projects and Collins said there was roughly $150 billion in the compromise package, ranging from transportation projects to efforts to expand high-speed Internet service.
A one-year fix of the Alternative Minimum Tax, costing about $70 billion, was also included the package. That would prevent middle-class taxpayers from being sucked into higher taxes paid by the wealthiest, which Congress never intended.
Republicans have been nearly unanimous in their opposition to the stimulus legislation, arguing it was poorly crafted and could end up wasting taxpayer money. Some House Republicans on Capitol Hill complained that they had been left out of the final negotiations.
Alone, the stimulus package is unlikely to fix the U.S. economy because it does not address financial sector problems that dried up credit. The Obama administration hopes that will be addressed through a bank rescue program unveiled on Tuesday but Wall Street expressed disappointment there were not more details. (additional reporting by Richard Cowan and Susan Cornwell; editing by Frances Kerry and Cynthia Osterman)