Obama and McCain battle over taxes and economy

NASHVILLE, Tennessee (Reuters) - Republican John McCain and Democrat Barack Obama battled over taxes and the best way to help struggling middle-class workers Tuesday during a sometimes tense presidential debate that highlighted a wide gap in their economic approaches.

With U.S. financial institutions reeling under what Obama called the worst crisis since the Great Depression, the presidential rivals in the November 4 election differed frequently with only rare flashes of the open rancour that has marked their recent rhetoric on the campaign trail.

"Americans are angry, they're upset and they're a little fearful," McCain said in the second presidential debate, at Belmont University in Nashville, Tennessee. "We don't have trust and confidence in our institutions."

The Arizona senator, criticized for not being responsive on economic issues, was under pressure in the debate to stop his slide in the polls and halt the momentum for Obama that has bloomed during the economic crisis.

He proposed a new program, to be run by the Treasury Department, which would buy mortgages from homeowners facing financial problems and replace those mortgages with new, fixed-rate mortgages.

His campaign said the program would cost roughly $300 billion (171 billion pounds). Democrats in Congress have been calling for months for legislation to help families facing home foreclosures.

Obama said the financial crisis was aided by deregulation of the financial industry supported by McCain and Republicans. He said middle-class workers, not just Wall Street, needed a rescue package that would include tax cuts.

"We are in the worst financial crisis since the Great Depression, and a lot of you I think are worried about your jobs, your pensions, your retirement accounts," he said.

McCain portrayed Obama as an eager supporter of higher taxes who was unwilling to buck his own party, but Obama said McCain's policies would help the wealthy and strand workers at the bottom of the economic ladder.

"NAILING JELLO"

"Nailing down Senator Obama's various tax proposals is like nailing Jello to the wall," McCain said.

Obama responded with a crack about McCain's campaign bus. "I think the Straight Talk Express lost a wheel on that one," he said, explaining his plan would only tax those making more than $250,000 a year and most small businesses would not be affected.

Obama has solidified his national lead in polls ahead of the election and gained an edge in crucial battleground states in recent weeks as the Wall Street crisis focussed attention on the economy, an area where polls show voters prefer the Illinois senator's leadership.

The economic turmoil continued Tuesday, with stocks tumbling for the second consecutive day in a sign the $700 billion (401 billion pound) bailout of U.S. financial institutions did not ease market concerns about the economy.

Asked about a possible Treasury secretary under their administrations, both candidates mentioned Omaha's legendary investor Warren Buffett, a supporter of Obama.

The two candidates also clashed sharply in the final third of the debate over foreign policy, particularly the Iraq war. Obama was an early critic of the war, while McCain has been a staunch supporter and urged the "surge" strategy to increase U.S. troops.

"Senator Obama would have brought our troops home in defeat. I will bring them home in victory and in honour," McCain said.

Obama said the focus on Iraq had distracted the United States from the threat in Afghanistan, and he defended under attack from McCain his willingness to strike against terrorists in Pakistan without approval from Islamabad.

"We have fundamental differences about the use of military power," McCain said.

Polls judged Obama the winner of the first debate two weeks ago, but Tuesday's debate was conducted in a looser town hall format where questions were asked by the audience -- a favourite setting for McCain and a staple of his campaigns in the battle for the party nomination this year and in 2000.

About 100 undecided Nashville voters identified by the Gallup polling company posed the questions. The candidates talked directly to the audience and were free to roam the stage.

With only four weeks to go until the election, the two candidates will meet for one final debate on October 15.

(Editing by David Wiessler)