Chronic deadlock in Congress threatens to derail the US economy, damage national security and undermine public trust in its leaders, outgoing US Defense Secretary Leon Panetta warned Wednesday.

In his last major policy address days before he retires, the Pentagon chief blasted lawmakers for what he called a lack of leadership that has produced escalating budget crises.

The most urgent task facing the country is to overcome "partisan dysfunction in Congress that poses a threat to our quality of life, to our national security, to our economy, to our ability to address the problems that confront this country," said Panetta, who served as a lawmaker from California before holding senior posts under two Democratic presidents.

"Today, crisis drives policy," he told students at Georgetown University in the US capital. "It has become too politically convenient to simply allow a crisis to develop and get worse and then react to the crisis."

But inaction is costly, he warned.

"The price to be paid is that you lose the trust of the American people. You create an aura of constant uncertainty that pervades every issue and gradually undermines the very credibility of this nation to be able to govern itself."

Panetta's tough speech comes as Congress faces a March 1 deadline to broker a budget deal to avert multi-billion dollar budget cuts, with military funding due to take a major hit.

The Pentagon chief, who served as CIA director before taking over as defense secretary in 2011, renewed his warning that if Congress fails to break the impasse, automatic budget cuts will jeopardize the military's readiness and force cuts in training, maintenance and weapons programs.

Panetta's frustration with the current bitter political climate was evident as he frequently strayed from his prepared text to drive home his point, lamenting that lawmakers apparently no longer knew how to compromise.

"I've seen that attitude before," he said, recalling his days in Bill Clinton's White House, when Republican lawmakers helped force a government shutdown in 1995 which "badly hurt the American people."

"The same damn thing is going to happen again if they allow this to occur," Panetta said.

The looming threat of automatic defense cuts of roughly $50 billion this fiscal year, along with Congress's failure to adopt a proposed Pentagon budget for 2013, has forced the Defense Department to start laying off thousands of temporary workers while cancelling some maintenance.

The automatic cuts, or sequestration, were designed to be so dramatic that the prospect of so much pain would force lawmakers to cut a deal.

But instead, Panetta said, there are some members of Congress who have a "callous attitude" and are using the automatic cuts for tactical gain.

Republicans in the US House and Senate unveiled a plan Wednesday that they said would avoid the crippling sequester altogether by offsetting the costs of the cuts with federal workforce reductions.

"Frankly, our defense should not be used as a bargaining chip because of other policy aspirations that people want to accomplish," said Senator Kelly Ayotte, a sponsor of the legislation.

But Democrats quickly rejected the Republican plan as an "ongoing attack on federal employees."

At the White House, top aides to President Barack Obama met executives from the defense contracting industry, including the heads of Northrop Grumman Corp, Pratt & Whitney, BAE Systems Inc and the Aerospace Industries Association.

"The focus of the conversation was the potential devastating impacts of the sequester going into effect," said White House spokesman Jay Carney.

"A number of the participants noted the notion that allowing the sequester to take effect would somehow have limited effect or would be reversible -- that notion was disputed heavily in the meeting."

The Pentagon already has had to scale back projected defense spending over the next 10 years by about $487 billion under the Budget Control Act adopted in 2011.

But the US military's vast budget is still by far the largest in the world, with proposed spending for fiscal year 2013 of roughly $614 billion.