In its bi-annual budget outlook, details of which were obtained by Reuters from congressional sources, the nonpartisan agency also confirmed an earlier prediction of a $401 billion deficit in 2003 and forecast a cumulative budget deficit of $1.4 trillion over the next decade.

The report comes as the latest blow in a relentless drumbeat of fiscal bad news that has put the Bush administration on the political defensive.

The White House itself last month predicted that federal budget deficits would balloon to $455 billion this year and $475 billion in 2004 -- far above the previous record of $290 billion reached in 1992 -- even without factoring in the mounting cost of the U.S. occupation of Iraq.

CBO, however, forecast a smaller $401 billion deficit this fiscal year, which ends on Sept. 30, mainly because it assumes previously earmarked Iraq funds are being spent more slowly.

But both Democratic and Republican budget analysts agree the actual 2004 deficit could well come in far higher than the agency's "baseline" estimate -- likely topping $500 billion once likely new Iraq war spending requests are included.