WASHINGTON (Reuters) - Lawmakers on Friday agreed to extend a payroll tax cut for two months after Democrats bowed to Republican demands to expedite approval of a controversial oil pipeline.

The deal, which still would have to be approved by the full Senate and House of Representatives, fell far short of President Barack Obama's push for a one-year extension of the tax relief and long-term unemployed benefits to boost the country's fragile economic recovery.

In an effort to break a stalemate, Obama's fellow Democrats dropped what had appeared to be a non-negotiable demand for the Keystone XL oil pipeline from Canada to Texas to be kept separate from the payroll tax cut negotiations.

The deal immediately drew fire from environmentalists, who said it was an example of House Republicans holding the federal government hostage on behalf of the oil industry.

The measure would require Obama to make a decision on allowing construction of the Keystone XL pipeline within 60 days or declare that "oil trade with Canada is not in the national interest of the United States," according to an aide to Republican Senator Richard Lugar.

Obama recently put off a decision on the pipeline until 2013 while the government studies alternative routes. Many interpreted that move as a way to appease his environmental base ahead of the 2012 presidential and congressional elections.

The plan contains some significant victories for Republicans, who pushed hard for inclusion of the Keystone language, saying the project would create U.S. jobs at a time of high unemployment.

Democrats had been pushing for some tax hikes on the wealthy to help pay for the payroll tax cut -- such as ending a corporate jet tax break -- but they will not be included in this deal, according to one congressional aide.

The lost revenues from extending the payroll tax cut for another two months would be covered by raising fees investors pay for mortgage transactions involving government-sponsored agencies Fannie Mae and Freddie Mac, according to sources familiar with the deal.

(Additional reporting by Thomas Ferraro, Rachelle Younglai and Kim Dixon)

Source: Reuters US Online Report Politics News

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