(Adds analysts quotes, background)
By David Mardiste
TALLINN, March 12 (Reuters) - The small Baltic state of Estonia, mired in recession, raised the prospect on Thursday of trying to adopt the euro next year, a year earlier than previously expected.
Though it suffered a near 10 percent drop in output in the last quarter of 2008 and unemployment has risen steadily, inflation has tumbled. The government has also taken steps to keep its budget deficit with European Union limits.
The budget rigour and falling inflation led Prime Minister Andrus Ansip to announce unexpectedly that his nation of 1.3 million people could have a more ambitious euro timetable.
"It is possible Estonia will request an extraordinary assessment from the European Commission and ECB this year," he told a news conference. "And the purpose of requesting the assessment is so we could join the euro zone from July 1, 2010."
He said the inflation target for euro adoption could be met in October. Meeting the budget goal was up to the government and parliament, "and we must begin to achieve this", he said.
The central bank had earlier said 2011 was a realistic euro adoption year. The Finance Ministry backed up Ansip.
"It appears we will fulfil the Maastricht criteria during this year," it said in a statement. Estonia had the right to apply for an EU review of its economy outside the regular two-year cycle it added, though did not say if it would do this.
BUDGET WOES
The main factor which stopped Estonia meeting a 2007 euro adoption date was inflation, which soared during a consumer-fuelled boom. However, it has now fallen sharply and in February was down to 3.4 percent year-on-year.
The main worry now is keeping the budget deficit to within the required 3 percent of gross domestic product (GDP).
The government has already this year made budget cuts of 8 billion kroons ($653.2 million) and senior parliamentarian Taavi Veskimagi said further cuts of 5 billion kroons would be needed to stay within the EU deficit ceiling.
Estonia has been in the ERM-2 currency grid system, the waiting room for euro adoption, since 2004. Lithuania joined at the same time, while Latvia went in a year later.
Estonia's kroon currency is pegged at 15.6466 to the euro.
Despite Ansip's mention of a July entry, new euro zone members have so far joined on January 1.
Poland and Hungary have also tried to accelerate their euro membership, but a Reuters poll from January showed economists expect the next new entrant in 2013.
Analysts were split on Estonia succeeding next year.
"Technically it is possible," said Maris Lauri, chief economist at Swedbank in Estonia, saying inflation would be low enough. "The question is the budget and the deficit. If the government really wants to do it, then it is possible."
Neil Shearing of Capital Economics in London was sceptical.
"It is possible they could, but highly unlikely ... GDP will fall around 10 percent this year and ... it will be impressive if they can keep the budget deficit below three percent." (Writing by Patrick Lannin; Editing by Mike Peacock and Andy Bruce)