WASHINGTON -- President Barack Obama returns from vacation Tuesday to face legislative battles with newly empowered Republicans determined to slash spending and repeal his health care reform, the key legislative achievement of his first two years in office.

The new Congress convenes Wednesday with Republicans back in charge in the House of Representatives and their numbers -- while still a minority -- significantly increased in the Senate.

With the damaged economy, unemployment and the national debt uppermost among American concerns, Republicans have vowed to shrink government and ease federal oversight of the private sector. That, they argue, will unshackle private business to heal the wounds from the worst economic downturn since the Great Depression of the 1930s.

Obama and most Democrats counter that regulation is more necessary now than ever, especially after the private financial sector -- using untested investment tools -- nearly brought down the economy in the fall of 2008. And Obama and his fellow Democrats fought too long and too hard for health care reform to shirk even the smallest fight on that issue.

Obama has also said that a contraction of government spending -- with the economy still fragile -- could undo gains that have been made over the last 18 months.

More On This...

The health care fight is likely to come first, with House Republicans planning a vote on repeal before Obama's State of the Union address at the end of the month.

Though full repeal is a long shot -- the House vote would be just the first, easiest step -- they'll follow up with attempts to starve the overhaul of funding and dismantle what they derisively call "Obamacare" piece by piece.

The strategy is not risk-free for the Republicans, who won't have a replacement plan of their own ready by the time of the repeal vote. But they say there's no time to lose.

Senate Democratic leaders marked out their own territory in a letter Monday to House Speaker-to-be John Boehner, serving notice they will block any repeal.

All the while, the Obama administration intends to keep putting into place the law's framework for covering more than 30 million uninsured people. Ultimately, Obama still has his veto pen, and Republicans aren't anywhere close to the two-thirds majorities in both chambers of Congress needed to override.

More broadly, conservative Republicans, including many newly elected members of Congress backed by the tea party movement, want spending cuts imposed immediately. A first test comes when lawmakers have to pass a massive spending bill to keep the government running.

Another critical juncture could come as early as March, when Congress votes on whether to raise the federal debt ceiling. Some Republican lawmakers, including South Carolina Sen. Lindsey Graham, have said they won't vote to raise the debt limit unless there is a plan in place for dealing with long-term obligations, including Social Security, and for returning to 2008 spending levels. Social Security is the federal pension system for older Americans. It, along with the Medicare insurance program for the elderly and defense spending, account for a lion's share of the federal budget.

With the debt ceiling at $14.3 trillion, and the debt at nearly $13.9 trillion and growing daily, White House economist Austan Goolsbee said that refusing to raise the limit would have a "catastrophic" impact on the economy.

"That would be a worse financial economic crisis than anything we saw in 2008," Goolsbee said.

Despite Republican gains, Obama still holds some leverage -- namely a Democratic majority in the Senate that could counter Republican action in the House, and the veto power of the executive branch. He's also coming off a successful run in the final weeks of 2010, having secured wins in Congress on a tax compromise with Republicans, a new nuclear arms treaty with Russia and the repeal of the military's ban on gay service members.

The first weeks of the new year will be an early test of whether the president can build on those year-end victories and how he will deal with a divided Congress. And with a host of Republicans readying to run for his job next year, the administration will simultaneously be laying the groundwork for Obama's re-election bid, which will be run out of Chicago.

Senior adviser David Axelrod plans to head to Chicago this month, with Obama's 2008 campaign manager, David Plouffe, taking his place at the White House. More staff will follow Axelrod to Chicago, though aides have not yet been asked to commit to making the move.

Obama is also considering naming former Commerce Secretary William Daley to a top White House job, possibly chief of staff, a person familiar with the matter said Monday. Daley, an executive at JPMorgan Chase, would bring extensive private sector experience to a White House seeking to counter the notion that the president is antibusiness.

The person was not authorized to speak publicly on the manner and requested anonymity.

Obama has said there is unfinished business he wants to address this year, including energy legislation and immigration reform, specifically the DREAM Act, which was defeated in Congress last month. He has said he'll make another go at the legislation, which would provide a path to citizenship for young people brought to the U.S. illegally if they go to college or join the military.

White House officials say they also see some opportunities to work with Republicans on looming trade deals with Colombia and Panama.

Preparations are under way for a busy month for Obama, including visits from at least two major foreign leaders. Obama will host French President Nicolas Sarkozy on Jan. 10, said a senior administration official who confirmed the visit on condition of anonymity because it had not yet been announced by the White House. In addition, Chinese President Hu Jintao will be in Washington for a state visit on Jan. 19.

Obama will deliver his State of the Union address later this month, in which he'll outline his agenda for the year, including proposals for deficit reduction.