(Updates lead, adds Obama speech on Thursday and edits)

By Richard Cowan and Jeremy Pelofsky

WASHINGTON, Jan 7 (Reuters) - The U.S. budget deficit will swell to a record $1.186 trillion in fiscal 2009, congressional forecasters said on Wednesday, the result of an economic recession that has cut tax receipts and caused massive government bailouts of banks and automakers.

The out-of-control deficit picture by the Congressional Budget Office illustrates the daunting economic challenges President-elect Barack Obama faces when he takes office on Jan. 20.

But on Thursday, Obama will deliver a speech on the economy in which he will lay out his case for even more short-term deficit spending, possibly $775 billion or more over two years, to help heal the sick economy.

CBO also said the budget deficit could fall to $703 billion in the 2010 fiscal year which begins Oct. 1, 2009, as the U.S. recession begins easing.

The actual budget gaps for both years may be significantly greater as Washington prepares to pass the gigantic economic stimulus bill by mid-February.

The CBO report shattered President George W. Bush's pledge that the government would balance its budget by 2012. Instead, CBO sees significant deficits at least through 2019.

The recession, which began in December 2007, has brought major job losses and slashed consumer spending and tax revenues. Unhappy and anxious voters elected Obama to the White House and gave Democrats larger majorities in Congress.