(Adds increase in transport budget, markets)

By Muklis Ali and Ed Davies

JAKARTA, Aug 16 (Reuters) - Indonesia's president said on Thursday growth should accelerate next year to its fastest since 1996, boosting efforts to tackle widespread poverty and unemployment plaguing Southeast Asia's largest economy.

In an annual address to parliament ahead of Indonesia's Aug. 17 independence day, President Susilo Bambang Yudhoyono focused on the economy but also highlighted successes combating Islamic militants and controlling conflict zones in the huge country.

The former general, whose popularity sagged to its lowest since coming to power in late 2004 according to a poll in April, said a 2007 economic growth target of 6.3 percent was achievable and he forecast 6.8 percent growth next year.

Indonesia needs at least 6 percent growth to make inroads into chronic unemployment, although it fell short of that target last year, after a big increase in fuel prices in 2005 to curb huge subsidies.

Millions in the world's fourth-most populous country live on less than $2 a day, while data shows unemployment at 10 percent.

Pledging better access to jobs, education and healthcare, he said next year's budget for poverty alleviation would rise to 7 trillion rupiah ($743 million) from 3.9 trillion this year.

The 57-year-old president, dressed in a dark business suit and traditional black hat, also said in a prepared speech the economy should be able to ride out recent global market turmoil.

"I am sure with the strength of our economic and financial fundamentals, all the international reserves that we have, and the reinforcement steps we have taken, God willing, we can go through this with minimum impact."

His comments did little to stop a further tumble in Jakarta stocks and the rupiah currency on Thursday, as investors cut their exposure to higher risk assets amid global credit concerns. Jakarta's main stock index ended nearly six percent lower.

Indonesia's economy was devastated by the crisis that swept the region in the late 1990s and has found some stability, but has suffered bouts of capital flight in recent years.

MILITANT ARRESTS

Yudhoyono praised the nation's progress tackling terrorism, although he said the battle against militants in the world's most populous Muslim nation should go deeper.

"We should not only tackle the surface, but we need to touch the roots of the problem such as backwardness, poverty and injustice, extremism, radicalism and the culture of violence."

Police recently arrested two suspected top leaders of the regional militant group Jemaah Islamiah (JI), blamed for a string of deadly bombings in Indonesia.

He also said that the Poso area of central Sulawesi and the Maluku islands in eastern Indonesia -- areas that have seen fighting between Muslims and Christians, as well as militant attacks -- were under control.

Red-and-white Indonesian flags have been fluttering from buildings for days, with celebrations for the 62nd anniversary of independence due to be held across the vast country on Friday.

Yudhoyono played down worries that parts of a 2005 peace deal aimed at ending a 30-year separatist war in the resource-rich province of Aceh on the tip of Sumatra island were unravelling.

"It's normal to still find some tension and misunderstanding here and there because people were fighting each other for more than 30 years."

After a string of transport disasters including two major plane crashes so far this year, the president said the transport budget would be boosted by 64 percent next year to 16.2 trillion rupiah to improve safety and ageing infrastructure.

His speech barely touched on his administration's battle against corruption. Yudhoyono reshuffled his cabinet in May to replace the attorney-general and justice minister amid criticism that the campaign was failing to touch many vested interests. ($1 = 9,422 Rupiah) (Additional reporting by Adhityani Arga)

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