Gregg said he pulled out because of "irresolvable" differences over policy issues, including the $789 billion economic stimulus package that has so far drawn support from only a handful of Republican lawmakers.

A clearly annoyed White House said in a terse statement it regretted that Gregg withdrew after he had pursued the job.

"He was very clear throughout the interviewing process that despite past disagreements about policies, he would support, embrace and move forward with the President's agenda," said White House spokesman Robert Gibbs.

Three weeks after being sworn in, Obama, who pledged to hit the ground running to tackle one of the worst economic crises in decades, is still trying to form his 15-member cabinet. The Commerce Department, while not central to the fight, plays an important role in promoting US business around the world.

Gregg is the third cabinet nominee to withdraw his nomination and the second for the Commerce Department. The first Commerce nominee was New Mexico Governor Bill Richardson, who is facing a legal inquiry.

Former Senator Tom Daschle, who was supposed to spearhead reform of the healthcare industry, withdrew because of personal tax issues. A lower-level official at the Office of Management and Budget also withdrew her name for the same reasons.

Obama's Treasury secretary, Timothy Geithner, also had problems during his Senate confirmation process because he failed to pay certain taxes on time.

Gregg, considered a moderate Republican, sounded apologetic at a news conference to announce his withdrawal from contention, but he said he had decided the policy differences were too great for him to join Obama's cabinet.

"I just realized it wouldn't be a good fit," Gregg said, adding it "would be a bigger mistake" to take the job.

BID FOR BIPARTISANSHIP

"We are functioning from a different set of views on many critical items of policy," he said in a separate statement. "Obviously the president requires a team that is fully supportive of all his initiatives."

Gregg met Obama on Wednesday to tell him he was having second thoughts, but the president said he only learned of the senator's final decision on Thursday.

"We had had a discussion over the last couple of days," Obama said. "I wasn't sure whether he'd made a final decision or not. But clearly I think he was just having second thoughts about leaving the Senate, a place where he's thrived and been there for a long time."

Obama took over from Republican President George W. Bush last month vowing to boost bipartisan cooperation in Washington, where political bickering has stalled most legislation over the last several years.

He has spent his first weeks in office struggling to build broad bipartisan support for his economic stimulus package, which is headed for passage in Congress this week. Entrenched philosophical differences with most Republicans over tax cuts and spending stymied that effort.

"The one thing I want to make sure of is that people don't take from this the notion that we can't get Democrats and Republicans working together. I am going to keep on working at this," Obama told reporters travelling with him on Air Force One in Illinois.

Gregg's withdrawal could prompt Obama to reconsider Silicon Valley executive John Thompson to head the commerce department. Many lobbyists believed he had been in line to get the post before Gregg was tapped.

Thompson is chairman and chief executive officer of Symantec Corp, the No. 1 software security company best known to consumers for its Norton product line.