* Sweden likely best performer in Europe 2010 and 2011
* Growth to slow slightly but remain strong
* Crown seen strengthening further on more rate hikes
* Deeper euro debt crisis could tarnish rosy picture
By Simon Johnson
STOCKHOLM, Jan 13 (Reuters) - Buoyant domestic demand and a durable pipeline of industrial exports to developing nations will likely help Sweden repeat its performance as western Europe's fastest-growing economy for the second year running in 2011.
The Nordic country recorded its speediest expansion for 40 years in 2010, and while that achievement can in part be put down to the depth of its slump in 2009, its economy has been in a sweet spot.
China, India and Brazil, which are investing heavily in modernising their infrastructure, are driving the global recovery and Swedish industry, which is heavily skewed toward the production of plant and machinery, is reaping the benefit.
If the country's central bank is right, economic output expanded 5.5 per cent in 2010 and will grow another 4.4 per cent in 2011.
All of that, analysts say, adds to the allure of Swedish assets.
Predicted further interest rate hikes will support the Swedish crown -- recently trading near 10-year highs against the euro -- and analysts forecast more gains on the country's stock market as its top exporters continue to flourish.
"Sweden is Europe's top performer and the economy is certainly going to outperform again this year," said Tina Mortensen, economist at Citigroup Global Markets.
Citibank reckons the economy will expand 5 percent this year and 3.4 percent in 2012, and "the risks are definitely on the upside (for 2012)," Mortensen said.
"In the early stages of development, big infrastructure projects and IT investment, Sweden has a lot to offer," said Mauro Gozzo, chief economist at the Swedish Trade Council.
Domestic demand has also been strong.
Sound public finances gave Sweden the ammunition to stimulate the economy more than most during the downturn. Such measures amounted to around 2.8 percent of gross domestic product (GDP) over 2009 and 2010.
The banking system also remained sound. Swedbank, SEB were bruised by recession in the Baltics, but none of Sweden's major lenders had to be bailed out by the government.
Swedish households mainly have floating rate mortgages, meaning they benefited more quickly than households in other European countries when interest rates were slashed in 2008. House prices have continued to rise.
NO NEED FOR AUSTERITY
The pro-Sweden factors show no sign of going away.
China may be looking to cool its economy -- it raised rates in December and on Friday hiked bank reserve requirements for the fourth time in just over two months -- and growth could dip in other emerging markets, but the overall outlook remains strong.
The OECD forecasts world GDP growth of 4.2 percent in 2011 and 4.6 percent the year after, and trade growth will remain solid.
"Over the next 10 years, we think the prospects are very good for Asia, Brazil, a couple of other Latin American countries and a couple in the Middle East," Gozzo at the Swedish Trade Council said.
Nor has Sweden any need to impose the spending cuts that will sap demand across much of the rest of Europe.
In fact, after introducing tax breaks for pensioners this year, a fifth round of income tax cuts is expected in 2012 as government finances return to surplus.
Unemployment rose sharply during the crisis but has come down faster than expected, standing at 7.1 percent in November.
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WORRIES OVER CROWN
There are risks, notably from the strength of the crown and the potential for Europe's debt crisis to weigh more broadly.
The economic recovery and rate hikes have pushed the Swedish currency up steadily against euro.
Analysts see further gains, though after its stellar performance of the last two years these may be muted and could also be offset by an earlier than expected European Central Bank rate hike after its President, Jean-Claude Trichet, warned on Thursday of short-term inflationary pressures.
A higher crown over the longer term would eat into exporters' profits, which for the likes of compressor firm Atlas Copco and bearing maker SKF are at record levels.
Danske Markets senior analyst Kasper Kirkegaard said he saw the crown at 8.70 per euro in a year's time.
"As the fundamentals are improving ... we do see the potential for more appreciation than that," he said.
Banking group SEB sees fair value for the crown at around 8.27 to the euro. That compares with 8.97 on Friday.
Stockholm's blue chip index has beaten the broad European benchmark for the last two years, rising 23 percent and 46 percent respectively, but returns ahead are likely to be more modest, analysts say.
Further rate hikes would tend to make consumers more cautious and Europe's debt crisis could also cloud the rosy picture.
"The situation in Europe is the biggest worry," said SEB's Holmgren. "A double dip there would definitely be felt in Swedish exports and if there are continued problems, you would probably have financial stress that spills over into Sweden."
(Editing by John Stonestreet)