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Democrats, both in the White House and on Capitol Hill, are keenly aware that the first great defining battle of the 1996 election cycle may center on the federal budget, and they are struggling to find a way to turn it to their advantage.

The stakes are apparent to every Democrat, particularly the congressional leaders who met with White House officials this past week in a room at a Capitol they no longer control, near a portrait of the late Speaker Thomas P. O'Neill Jr. that struck some as a particularly poignant backdrop.The plea from many Democrats, there and in other somber meetings in recent days, has been simple enough: The party must re-claim the allegiance of the middle class if it has any hope of reversing the Republican electoral victories of last month.

The president's budget may be dead on arrival in a Republican-controlled Congress, as many predict, but it will be an important political statement in what one Democratic pollster, Geoffrey Garin, called the start of "a two-year war for the political main-stream."

The White House has been bombarded with advice in recent weeks, much of it contradictory. It has been urged to be bold, with big new cuts in federal programs, and it has been urged to simply lie back and let the Republicans do the hard work of finding the money to pay for their promises. (Some Democrats describe this as the "give them enough rope and they'll hang themselves" strategy.)

It has been urged to stay the course of the 1993 budget agreement and push for even more deficit reduction, and it has been admonished to concentrate on tax relief for middle-income families.

President Clinton will begin to make some choices at a series of meetings this week, but the broad thematic direction is already increasingly clear: Despite its cost, some form of middle-class tax cut is widely expected to be a part of the administration's budget proposal.

The House Republicans included a $500-a-child tax credit in their "Contract With America." For his part, Clinton promised a tax cut for the middle class during the 1992 presidential campaign, and the idea has strong support among House Democrats.

"We need to make a clear statement to those workers who have been the most hard-pressed and have fallen the furthest behind in the past 15 years," Rep. Richard Gephardt, the new House minority leader, said Friday.

"People earning between $15,000 and $30,000 split their vote in '94," Gephardt added. "We got 58 percent of them in '92. If we had gotten 58 percent in '94, we'd have held the House."

Similarly the White House is trying to respond to another message from last month's elections by moving toward deep cuts at an array of federal agencies. The president's advisers contend that all these moves are simply Clinton being Clinton, not an attempt to "me too" the Republicans.

"What the Republicans succeeded in doing was stealing huge chunks of the Clinton agenda, which is reform," said Paul Begala, a longtime political adviser to the president.

"Congressional reform, budget reform, line item veto, welfare reform and a middle-income tax cut. The difference is, Clinton is serious about it, while the Republicans are just posturing."

But Bill McInturff, a prominent Republican pollster and strategist, asserted, "My guess is what the president is doing is readily transparent to the American people."

"When Democrats say, `Maybe we should cut this agency or that one,' " he added, "we should just say over and over again: `Hey, he had two years to do this. He's just trying to get re-elected.' "

Indeed, many Democrats fear that no matter how artful their positioning, the Republicans will have not only their first legislative control over taxing and spending in 40 years but political control of the coming battle as well.

The Democrats worry that getting into a fiscally dangerous tax-cut bidding war with Republicans, like the one that occurred in 1981, would erode last year's hard-won progress on the budget deficit.

"We could accept everything the Republicans suggested and everything the Democrats suggested, and the only people who lose are the future generations," said Rep. Benjamin L. Cardin of Maryland, a Democrat on the House Ways and Means Committee.