WASHINGTON, May 25 (Reuters) - The head of the U.S. Department of Veterans Affairs faced angry lawmakers on Thursday and described how the theft of a device the size of an iPod containing personal data on 26.5 million veterans may cost taxpayers as much as $500 million.

"As a veteran myself ... I am mad as hell," Veterans Affairs Secretary Jim Nicholson told the House Committee on Veterans Affairs.

Nicholson said a department employee who had taken the data home without authorization was placed on administrative leave and "other people are also in my sights as a result of this." The data was stolen from the employee's home in Maryland.

Nicholson said he could not promise the government would cover all potential losses by veterans, but suggested Congress pass a law to do so.

"There is no sign that any of this (stolen names, Social Security numbers and birth dates) is being used at this time," Nicholson said. Criminals can use such data in credit-card fraud and other identity theft scams.

Asked how much it would cost to prevent and cover potential losses, Nicholson estimated "way north of $100 million" and did not rule out a total cost as high as $500 million.

Members of the panel, however, said they see the incident as part of broader administrative problems in the department. Some Democrats called for Nicholson's resignation.

"This is a defining moment of your leadership," said panel chairman Rep. Steve Buyer, an Indiana Republican. "It is not just a question of some low level employee."

Nicholson told the panel the data "did not include any of the VA's electronic health records." But Rep. Bob Filner, a California Democrat, pressed the Bush Cabinet secretary until he acknowledged the stolen data contained some information on the medical conditions of nearly 3 million veterans.

While the stolen disk drive did not contain detailed medical records, it did contain codes that describe physical disabilities, Nicholson said.

Filner accused the department of having "a culture of indifference," adding that veterans will have to be vigilant "for decades" to make sure they do not become victims of identity thieves.

 Authorities said on Monday that a hard drive containing the unencrypted personal information was stolen on May 3.

Nicholson said that, among other steps to improve security, the department must pinpoint how many employees telecommute.

"We have people telecommuting all over the country. We need to know who they are. They have an enormous amount of data," he said describing how some employees were surprised to learn that one of their colleagues was working from South Dakota rather than from an office in Washington, D.C.

More than 100,000 worried veterans have flooded the department's call center in recent days seeking information on the stolen data and how they might prevent being victimized.

"The VA is neither alone or unique in the possibility for such an incident," EMC Corp. (EMC.N: Quote, Profile, Research) Vice President Dennis Hoffman told Reuters after testifying to the committee. EMC is best known as an information storage hardware provider.

Nicholson is a former chairman of the Republican National Committee and has held his current post since February 2005.

The data related to everyone discharged from the military since 1975, and some discharged earlier if they had filed a benefits claim, officials said.    

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