OLYMPIA — Gov. Chris Gregoire, nervously eying a possible national recession, urged state lawmakers Monday to “batten down the hatches” and keep a fat budget reserve.

For the first time, she indicated she might accept a savings account smaller than $1 billion, but said she’s still demanding a frugal state budget this winter.

Even before the national and international slowdown and the swoon on Wall Street, Gregoire proposed saving most of the state’s projected reserve of $1.4 billion. The governor proposed a $1.2 billion savings account and legislative leaders were talking about a $1 billion level.

The state Revenue Forecast Council is expected to punch a big hole in that surplus when it meets on Friday. Senate Majority Leader Lisa Brown, D-Spokane, an economist, is predicting a hit of between $150 million and $200 million. The council chairman, Rep. Jim McIntire, D-Seattle, has the same guess. Senate budget Chairwoman Margarita Prentice, D-Renton, said it could be even worse.

Gregoire told a news conference she is making no prediction, but said it’s time to consider trimming the $33.3 billion, two-year budget that was written last year, and to be cautious with any new spending.

Approving any new priorities, such as flood relief and housing-related spending, may require postponing some of the previously approved appropriations for other things, she said.

She did not give examples of possible budget cuts.

Gregoire indicated she’s willing to back off her request for $1.2 billion, and possibly even below the $1 billion mark, depending on how bad the new forecast is. That was the first time she has said $1 billion isn’t an absolute bare minimum reserve she would accept.

But Gregoire said she still wants a frugal approach, given these uncertain times.

“Our (state) economy is strong, but the national economy is weak and weakening,” she said. “I want us to batten down the hatches. I want us to leave a good reserve.

“Now is the time to be fiscally frugal because I can’t tell when the nation is going to pull out of this economic downturn, to be perfectly honest with you.”

Prentice said lawmakers are prepared for bad news from the forecast council and spending will be restrained.

“It doesn’t look good,” Prentice said. “It’s a tough time and in tough times, you tighten up.”

The House releases its draft of the budget next week, probably on Wednesday.

In a report released by the forecast council on Monday, ChangMook Sohn, the state’s chief economist, said actual revenue collections are up about $20 million above the level forecast in November.

Consumer spending weakened considerably in December, but strong tax receipts from October and November more than offset that, he said. Year-over-year growth for the fourth quarter of 2007 was 6.3 percent, better than the national 4.8 percent growth.

Retailers reported a falloff in five of 12 sectors, including car dealers, electronic and appliance stores, building materials and garden supply stores.

Some sectors were bright spots, Sohn wrote, including construction, up 8 percent, information, up 11.4 percent, and wholesale trade, up 10.7 percent.

Overall, sales, business and utility taxes were down $32 million in December from the last forecast. But the three-month total is still up nearly $33 million because of the robust October and November activity.

The real estate sector, which helped ignite the state economy in recent years, is weak. January 2008 taxable activities were nearly 36 percent below a year earlier, dropping about 18 percent last month.

National economic news is mostly negative, Sohn noted, with weak growth in the gross domestic product, falloff of jobs, and lower consumer confidence. But he also noted that both the state and national unemployment rates remain low.