By Greg McCune

INDIANAPOLIS (Reuters) - Indiana Republican Governor Mitch Daniels, who considered running for president but decided against it for family reasons, said on Friday the Republican presidential candidates had mishandled the recent debate over women's health and contraception.

Daniels, a popular two-term governor who gave the Republican response to President Barack Obama's State of the Union speech last month, said the Republican campaign had been too negative, but he made clear that he was not interested in jumping into the fray at this late stage.

He said that he wished the candidates would observe former President Ronald Reagan's rule that Republicans should not speak ill of each other.

In an interview with Reuters, he voiced misgivings about how the Republican presidential candidates have framed issues, especially the recent debate over women's health and contraception.

The Obama administration's recent decision to require religious institutions such as Catholic-run hospitals to offer insurance plans that cover birth control for women, which his administration later modified under pressure from critics, was "a radical expansion of federal power," Daniels said.

Catholic bishops were outraged by the rule and launched a campaign to overturn it that has been eagerly joined by Republican candidates.

"Where I wish my teammates had done better and where they mishandled it is ... I thought they should have played it as a huge intrusion on freedom," Daniels said.

Instead, he said they got dragged into a debate about women's right to contraception, an issue which was settled 40 years ago.

Daniels said they should have framed the argument as one about government intrusion on personal liberty. He said the Obama rule was like saying that because Yoga is healthy, the government should require it.

Daniels did not criticize any of his party's candidates by name. Asked why there was so much focus in the Republican campaign on social issues when jobs and the economy were the biggest concerns of voters surveyed in polls, Daniels said some of that was not their fault.

"The Republican candidates didn't start it (the birth control debate). It happened and they were asked to react to it," he said.

U.S. ECONOMIC PREDICAMENT

On the economy and the national debt, which Daniels sees as the most important issues, the Indiana governor also chided Republicans for not stressing the gravity of the problem.

Republican candidates have not discussed the U.S. economic predicament "often enough and not specifically and constructively enough to suit me."

"I believe this is the central danger to our country ... and I hope that it will become the defining issue of the campaign," Daniels said.

While he mildly criticized the Republican candidates, he blasted Obama for not mentioning the national debt in his State of the Union address, saying it would be like Franklin Roosevelt not mentioning Japan in a speech during World War Two.

Daniels said former Massachusetts governor Mitt Romney seemed to have the best chance to get the Republican nomination, although the Indiana governor would not be endorsing any candidate.

Indiana holds its primary on May 8 and Daniels said he hoped it would generate excitement and draw candidates to the state as the campaign continues to be competitive well into the year.

While Romney leads in delegates, former Pennsylvania Senator Rick Santorum and former House Speaker Newt Gingrich are vowing to continue the fight.

Obama won Indiana in the 2008 presidential election, but the state has trended Republican since then, and Daniels predicted Obama would not win in the state in 2012 unless there was a Republican campaign collapse.

Earlier on Friday in a speech to the Society of American Business Editors and Writers (SABEW) conference, Daniels said he was not interested in serving as the vice presidential nominee on the Republican ticket. Daniels has been on many lists of possible candidates.

Asked about Romney's recent stumbles in trying to connect with voters, Daniels said Republican candidates needed to get out and talk to low-income people and not allow themselves to be labeled as only supporting the rich. Daniels noted he stays in the homes of local people when he travels around the state of Indiana and enjoys it.

Since opting out of the Republican race, Daniels was briefly in the national spotlight when he led the effort to make Indiana the 23rd state to adopt "right-to-work" legislation allowing workers at unionized businesses to opt out of union membership.

He said the new law, passed only a month ago, has resulted in at least three economic deals and as many as 30 in the pipeline. He declined to identify the companies involved in the deals.

Unions have criticized the new law as "union busting" and have said it would drive down wages in the state.

(Additional reporting by Susan Guyett; Editing by Tim Gaynor and Cynthia Johnston)