(Adds details, Cameron response)
KRUEN, Germany, June 7 (Reuters) - U.S. President Barack Obama told Prime Minister David Cameron he hoped Britain would keep military spending at 2 percent of national output, despite London's need to cut a sizeable budget deficit, a British source said on Sunday.
Obama pressed Cameron on the sensitive subject in a bilateral meeting on the sidelines of a summit of the Group of Seven industrial nations in Germany amid concern in the United States that defence spending in its closest ally could be poised to fall below the NATO target.
The exchange will add to domestic pressure on Cameron to maintain defence outlays. Many of his Conservative lawmakers have already urged him to promise not to cut the military budget, something he has so far refused to rule out.
"They touched on 2 percent," the British source said. "The president underlined the importance of the UK and the US - we are the two pillars of NATO - and said he accepted the fiscal challenges but hoped that the UK would find a way to meet it."
Cameron told Obama Britain was meeting the 2 percent target for now and reeled off a list of how Britain was using its army around the world, in places like Iraq, to help Washington, the source said.
The British government is due to hold a spending review in the autumn and Cameron, whose government has pledged to erase the deficit as fast as it can, has repeatedly declined to confirm he will maintain spending at the NATO target level. (Reporting By Andrew Osborn; Editing by Paul Taylor)