WASHINGTON - The head of the largest U.S. labor federation urged President Barack Obama on Tuesday to use the $700 billion Wall Street bailout fund to help cash-starved small businesses as a way to stem rising joblessness.

In a preview of labor's contribution to Obama's December jobs summit, AFL-CIO President Richard Trumka said money from the Troubled Asset Relief Program could be lent directly to small- and medium-sized businesses at commercial rates.

He said TARP money could also help small community banks that were ignored during the financial rescue effort by having them manage the loans.

The proposal, unusual for a labor organization, is part of a five-point AFL-CIO plan to address rising unemployment that hit 10.2 percent in October, its highest rate in 26-1/2 years.

The AFL-CIO jobs plan also calls for extended unemployment benefits, food assistance and healthcare for the unemployed, more money for infrastructure projects and state and local governments, and job creation aimed at distressed communities.

Trumka will take the plan to the White House next month, when he joins business leaders, economists and others for a December 3 brainstorming session on how to tackle joblessness in the weakest economy since the Great Depression.

Rising unemployment poses a political danger to Obama as his fellow Democrats in Congress approach the 2010 election with voters increasingly dissatisfied with incumbents.

The AFL-CIO and other union groups need to retain the Democratic majority to win reforms that could reverse decades of labor decline. Trumka is also trying to sweeten labor's appeal to businesses, young workers and college students as part of an effort to reverse decades of declining union membership.

If small businesses can get credit, they will create jobs. And we need jobs now, Trumka said in a speech to the Economic Policy Institute, a left-leaning Washington think tank.

This is something they can do right now and it would make a critical difference.

The TARP fund was created in the depths of the 2008 financial crisis to shore up banks after investment bank Lehman Brothers failed.

The AFL-CIO's proposal comes as the White House considers whether some of the TARP fund's remaining $210 billion should be used to help debt-burdened families and small businesses.

(Reporting by David Morgan; Editing by Eric Beech)