By Victoria Cavaliere

(Reuters) - The Obama administration is teaming up with researchers from Texas to intensify the battle against a fungus that has caused $1 billion in damage to coffee plants across Latin America and the Caribbean, U.S. foreign aid officials said on Sunday.

The so-called leaf rust, or roya, is a yellow and orange-colored fungus that has swept coffee fields from Mexico to Peru over the past two years, threatening to stunt production and drive up the price of Latin American roasts.

Especially hard hit have been Central America's arabica coffee plants, which produce high-quality beans used in espressos and gourmet specialty blends that are in growing demand in the United States and elsewhere around the world.

Moreover, the blight is jeopardizing the livelihood and food security of about 500,000 people who make their living in the coffee industry, especially small farmers and seasonal workers, according to the U.S. Agency for International Development (USAID).

Mass job losses could in turn leave displaced coffee workers more susceptible to the illegal drug trade and associated violence in countries such as Guatemala, Honduras and El Salvador, agency spokesman Matthew Herrick said on Sunday.

In a new program to be formally announced on Monday, USAID is launching a $5 million partnership with Texas A&M University's World Coffee Research that seeks to eradicate the fungus, the agency said in a statement.

The partnership will support research to develop rust-resistant coffee varieties and expand the capability of the Latin America's coffee institutions to monitor and respond to outbreaks of the blight, USAID said.

"The current coffee rust outbreak is the worst in Latin America's history," the agency said in its statement. "It is estimated that production will fall by as much as 15-40 percent in the coming years."

Sharply falling production yields would likely result in U.S. consumers paying more for their favorite roasts at the local grocery store and coffee shops, officials said.

The program with Texas A&M is part of the Obama administration's Feed the Future initiative, a global anti-hunger and anti-poverty effort that USAID said has reached 7 million small farmers and 12.5 million children.

The latest USAID effort brings to $14 million the sum invested by the agency in the fight against coffee rust, officials said.

(Reporting by Victoria Cavaliere; Editing by Steve Gorman, Bernard Orr)