First lets get both the straight lines
Solve for y: -1 + x^2 + 2 y - y^2 = 0 Multiplying both sides by -1: 1 - x^2 - 2 y + y^2 = 0 y = (2 ± sqrt(4 - 4 (1 - x^2)))/(2) = 1 ± sqrt(x^2): so they are y=1+x and y=1-x
now they both are tangents to (x-h)^2+(y-k)^2 = 1/2
condition for tangency: c=±a*sqrt(1+m^2)
=>1=±a*sqrt(1+1)
=>a=±1/sqrt(2)
so eqn is (x-h)^2 +(y-k)^2 = a^2.