The Congressional Budget Office on Tuesday called the U.S. budget outlook "bleak," in a forecast that hurts the chances for extending Bush-era tax cuts and raises pressure for fiscal belt-tightening.

In its annual report, the nonpartisan CBO pegged the 2010 U.S. budget deficit at $1.35 trillion, a slight decrease from the $1.4 trillion 2009 deficit that set a post-World War II record.

The...