* Insurance mandates need hardship waivers, Obama says

* Says small business should be exempt as well

* Strongly backs new government insurance plan (Adds details on worries about a government plan)

By Donna Smith

WASHINGTON, June 3 (Reuters) - President Barack Obama told Congress on Wednesday he was open to making mandatory health insurance part of an overhaul of the U.S. healthcare system but only with exemptions for the poor and for small businesses.

Obama, setting out requirements for a new national healthcare bill he hopes will be passed by October, tempered his early opposition to an insurance mandate, which is backed by the insurance industry.

Obama, in a letter to the heads of two Senate Committees working on the legislation, said he accepted they were likely to include a mandate but that it should include hardship waivers for those who cannot afford the premiums and exemptions for small business.

With insurance market reforms likely to require insurers to provide coverage regardless of medical condition, insurers are worried that without a mandate requiring coverage people will wait until they are sick to buy insurance.

The willingness of Obama and his fellow Democrats who control Congress to compromise on key provisions makes it more likely they will achieve his goal of enacting a far-reaching revamp of the $2.5 trillion healthcare system.