UPDATE 5-Obama announces tax deal with Republicans

* Obama announces compromise deal

* All Bush tax cuts to be extended for 2 years

* Could face resistance from liberal Democrats (Adds congressional reaction)

By Matt Spetalnick and Patricia Zengerle
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WASHINGTON, Dec 6 (Reuters) - President Barack Obama on Monday unveiled a compromise deal to extend all Bush-era tax cuts for two years, giving ground to emboldened Republicans who won big in last month's congressional elections.

After meeting Democratic leaders at the White House, Obama announced a "framework" agreement with Republicans that would renew tax cuts not just for the middle class -- as he and fellow Democrats had sought -- but also for wealthier Americans, as Republicans wanted.

The tentative plan is expected to draw resistance from some liberal Democrats, who have expressed disappointment that the president was bending to Republican demands while not gaining enough in return. Obama might need Republican help to pass the package if enough of his fellow Democrats revolt.

The tentative tax-cut deal, which is expected to extend breaks on dividends and capital gains as well, also calls for a 2 percent employee payroll tax cut and a 13-month extension of unemployment benefits, which could placate some Democrats.

But Obama acceded to Republican demands on the federal estate tax, by agreeing to a maximum 35 percent tax with a $5 million individual exemption level, which he admitted was more generous than he felt was "wise or warranted."

"We cannot play politics at a time when the American people are looking for us to solve problems," Obama told reporters. "I am confident ultimately that Congress is going to do the right thing."

Obama said he had made some concessions because of the urgent need to reach a deal before Congress adjourns this month to avoid allowing the middle class to face higher taxes when all of the Bush-era cuts expire on Dec. 31.

"I have no doubt that everyone will find something in this compromise that they don't like," Obama said. " In fact, there are things in here that I don't like -- namely the extension of the tax cuts for the wealthiest Americans and the wealthiest estates. But these tax cuts will expire in two years."

Extending all the tax cuts for two years would cost $501 billion, according to the congressional budget office, at a time when Obama is under pressure to cut the $1.3 trillion budget deficit. The CBO said renewing the rates will boost the economy in the short term but be harmful in the long term.

"FISCALLY IRRESPONSIBLE"

Obama's concessions reflected a new political reality. Republicans gained the upper hand in the tax fight after scoring big gains in the Nov. 2 congressional elections, which were seen as a verdict on Obama's handling of a stumbling economy and persistently high unemployment.

Obama's tax proposal was still likely to meet some resistance from Democrats in Congress but analysts believe it faces a good chance of ultimately being approved before the end of the legislative session.