WASHINGTON - President Barack Obama pushed job creation to the top of his agenda on Wednesday and vowed not to abandon his struggling healthcare overhaul after a political setback that raised doubts about his leadership.

Jobs must be our number one focus in 2010, he said in his annual State of the Union address as U.S. unemployment remained at a painful 10 percent and the weak economy dominated the debate before coming congressional elections in November.

Obama admitted he had made mistakes and that his first year in office had been a difficult one, but promised not to give up in his efforts to change the way that Washington works and push through his ambitious legislative agenda.

I don't quit, he told the U.S. Congress. Let's seize this moment -- to start anew, to carry the dream forward, and to strengthen our union once more.

He pledged to slap tough new regulations on Wall Street but said he was not interested in punishing banks, comments which helped boost U.S. stock futures by appearing to retreat slightly from some of his recent fiery rhetoric.

Obama said he would work to dig the country out a massive fiscal hole and was willing to use his presidential veto power to enforce budgetary discipline.

He also pledged to double exports in five years to help create jobs, comments which weighed on the dollar and prompted some in the market to think the government may seek a weaker greenback.

Others said there was little substance to his promise to boost jobs and exports.

The devil is in the detail, said Andrew Neale, portfolio manager at Fogel Neale Wealth Management in New York. Making a speech and getting things done are two very different things.

Still smarting from a drop in his popularity and the loss by his Democratic Party of a pivotal U.S. Senate seat in Massachusetts, Obama did not gloss over his political difficulties and acknowledged some mistakes.

But his tone at times was feisty and defiant.

Even as he signaled a recasting of his agenda by making the economy the most pressing priority, Obama did not concede the defeat of his sweeping agenda, including revamping healthcare system and forging a bipartisan consensus on climate change.

The loss in Massachusetts was seen by some political analysts as a referendum on his agenda, reflecting voter anxiety about the healthcare effort but also frustration with punishing double-digit unemployment.

People are out of work. They are hurting. They need our help. And I want a jobs bill on my desk without delay, he said.


Huge deficits have also hurt Obama's political standing. Republicans have sought to paint him as a big spender and characterized the healthcare bill as a government intrusion into the economy.

To counter the criticism on spending, Obama proposed a three-year freeze on some domestic programs to take aim at soaring budget deficits. He also called for the creation of a bipartisan commission to tackle long-term budget challenges.

If we do not take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery, Obama warned.

Republican Senator and his former rival for the presidency John McCain said he was disappointed.

It was disingenuous for him to talk about spending freezes in 2010 when he wants a 'jobs bill' that could be anywhere from $80 billion to $115 billion, he said.

Viewers polled by CNN seemed similarly unconvinced, 48 percent giving the speech a favorable rating, compared to 68 percent a year ago.

Obama's healthcare reform legislation faces possible failure now that Democrats no longer hold a supermajority of 60 Senate votes to overcome Republican procedural hurdles.

The climate legislation has stalled and even some of its supporters believe it may be sidelined this year.

He insisted he was not giving up on healthcare reform.

By the time I'm finished speaking tonight, more Americans will have lost their health insurance. Millions will lose it this year, Obama said. I will not walk away from these Americans. And neither should the people in this chamber.

He criticized bad behavior and recklessness on Wall Street and demanded Congress pass robust legislation on financial regulation.

Obama promised to push back against financial industry lobbyists who are seeking to water down or kill the proposed legislation.

We cannot let them win this fight. And if the bill that ends up on my desk does not meet the test of real reform, I will send it back, Obama said.

The unexpected Democratic setback in Massachusetts, one of the country's most liberal states, followed defeats for the party in governors races last year in Virginia and New Jersey.

Many Democratic lawmakers fear those races could be a harbinger of crushing losses in November's congressional elections.

That has prompted Obama to move toward the political center with a focus on themes such as deficit reduction.

But in a move that may play well with his Democratic supporters, Obama urged Congress to repeal the policy of Don't Ask, Don't Tell that prevents openly gay people from serving in the military.

Virginia Governor Bob McDonnell, delivering the Republican response to Obama's speech, said his call for a freeze on some domestic spending was laudable but urged further steps.

McDonnell also rejected Obama's push to revamp the healthcare system, saying it amounted to turning over the best medical care system in the world to the federal government.

Obama highlighted economic improvements and tried to deflect criticism that the healthcare push shifted his focus.

The economy was shedding hundreds of thousands of jobs each month when Obama took office.

After two years of recession, the economy is growing again, Obama said.

(Additional reporting by Alister Bull, Jeff Mason and Matt Spetalnick, editing by Chris Wilson and Simon Denyer)