(Updates throughout)

By Donna Smith

WASHINGTON, Sept 20 (Reuters) - U.S. lawmakers on Thursday prepared for a major battle over children's health care as President George W. Bush vowed to veto a Democratic-backed bill that would raise cigarette taxes to pay for expanding a program for kids in low-income families.

Democratic leaders in the Senate and U.S. House of Representatives are moving toward agreement on a bill that would increase funding for the State Children's Health Insurance Program by $35 billion and raise federal cigarette taxes by 61 cents a pack to $1. Congress is likely to vote on the bill next week.

Senate Majority Leader Harry Reid, a Nevada Democrat, accused Bush of "going back on his word" on a campaign promise to enroll millions of kids in the program.

Bush at a news conference called the emerging bill "an incremental step toward the goal of government run health care for every American" and vowed to veto it.

Bush accused Democrats of playing politics with children's health care and said he has enough support to sustain his veto even though many of his own Republicans back the legislation.

"My goal is to pass legislation getting something done for those in need, not getting nothing done so those officials in Washington can claim political victory," Bush said. He maintained the emerging legislation would benefit families earning as much as much as $83,000 a year.

"The proposal would move millions of American children who now have private health insurance into government-run health care," Bush said.

He also said he opposed raising tobacco taxes and higher taxes were not needed to fund the program.

Bush asked Congress to temporarily extend the existing program, which is set to expire at the end of September, to give lawmakers time to work out differences. Bush has asked for an extra $5 billion over five years added to the current $25 billion funding level.

Access to affordable health care is already becoming a major issue in advance of the November 2008 presidential elections with Democrats offering ideas on how to cover millions of uninsured Americans.

The children's program was designed to provide health care for children of low-income families who cannot afford private health insurance, but who make too much money to qualify for the Medicaid health program for the poor. More than 6 million children are currently enrolled in the program.

Democrats say more money is needed to help families and ensure that all eligible children get the health care they need. As many as 10 million children could get health coverage under the proposed legislation.

"This president will not even blink when he sends us a bill in a week or so asking for $198 billion more dollars for the war in Iraq and yet he is unwilling to spend $6 billion for health insurance for children (each year)," said Sen. Richard Durbin, an Illinois Democrat. "This is an issue worth fighting for." (Additional reporting by Joanne Kenen)

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