By Phil Stewart and Susan Cornwell
WASHINGTON (Reuters) - President Barack Obama's pick to lead the Pentagon told Congress on Thursday he would ensure fiscal discipline of the U.S. military, saying the days of booming growth and "unlimited" defense budgets were over.
Leon Panetta, the outgoing head of the CIA, is expected to easily win confirmation as the next defense secretary and lawmakers praised him for last month's successful covert operation to kill Osama bin Laden.
But America's huge debt and deficit are expected to cast a long shadow over the military he will inherit, pressuring Panetta to push defense budgets lower and speed a withdrawal of U.S. troops from Afghanistan due to begin next month.
"Our challenge will be to design budgets that eliminate wasteful and duplicative spending, while protecting those core elements that we absolutely need for our nation's defense," Panetta told his Senate confirmation hearing.
Panetta reminded lawmakers about persistent national security challenges that he said would require a strong military, including the threat from al Qaeda and its allies in the Afghan-Pakistan region, Yemen, Somalia and beyond.
He suggested some troops should remain in Iraq past an end-year deadline to withdraw, if asked by Baghdad, in order to preserve security gains. He expected Iraq would make that request "at some point."
The nomination of Panetta, a longtime Democratic Party insider and White House chief of staff under President Bill Clinton, is part of the biggest realignment of Obama's war council to date. It will change the chemistry of the president's closest national security advisers, a group that in the past has been marked by divisions over Afghan war policy.
Panetta is due to be replaced at the CIA with General David Petraeus, who is now running the Afghan war effort. General Martin Dempsey, currently chief of staff of the Army, will replace the outgoing chairman of the Joint Chiefs of Staff.
In a preview of the kind of budget questions Dempsey is likely to face, senators grilled Panetta about soaring costs of weapons systems. Republican Senator John McCain complained of "terrible out-of-control costs" and Senator Lindsey Graham suggested going to a fixed price system of contracting.
"That's a suggestion worth looking at," Panetta said.
BIN LADEN AFTERMATH, PAKISTAN TIES
Following the raid that killed bin Laden in Pakistan, congressional criticism has grown of the Afghan war and its price tag of over $110 billion a year. Many are calling for a more rapid drawdown after nearly a decade of conflict.
Republican Senator Susan Collins, a moderate Republican, expressed doubts about strategy, telling Panetta flatly that "I don't see how we get to a stable state in Afghanistan."
"That seems to be a never-ending mission," she said.
Panetta, whose youngest son served in Afghanistan, said he agreed with Obama's statement about the need for a significant initial drawdown in July but stressed that he would not do anything to undermine hard-won battlefield progress.
Amid speculation Obama could withdraw at least 10,000 troops within the next year, Panetta refused to offer any opinion on any specific figure. But he broadly signaled his alignment with outgoing Defense Secretary Robert Gates, who has warned against hasty drawdowns in Afghanistan.
"He and I pretty much walk hand in hand on these issues," Panetta said.
Panetta said bin Laden's death had given the United States the best opportunity since the September 11, 2001 attacks to destroy al Qaeda.
"But to do that, to be able to finish the job, we have got to keep our pressure up," he said. "If confirmed, my first task at (the Department of Defense) will be to ensure that we prevail in the conflicts that we are engaged in."
Success in Afghanistan would not be possible unless Pakistan eliminated safe havens militants use to attack U.S. forces across the border, he said, signaling he would not let up U.S. pressure on Islamabad as defense chief.
He said he believed Libyan leader Muammar Gaddafi would ultimately buckle if the international community kept tightening the screws on his regime, including a campaign of NATO air strikes.
"There are some signs that if we continue the pressure, stick with it, ultimately Gaddafi will step down," he said.
On Iran, he echoed Obama's remarks that all options remain on the table in dealing with Tehran's nuclear program -- which the West believes is aimed at making a bomb.
Asked whether that would include credible military plans to strike and destroy Iran's nuclear facilities, Panetta said: "We should keep all options on the table, and that would obviously require appropriate planning."
(Additional reporting by Missy Ryan; Editing by Eric Walsh)