By Jan Strupczewski
BRUSSELS, May 5 (Reuters) - Euro zone economic growth is likely to be stronger thus year than previously thought and the budget deficit should be lower, the European Commission said, but warned of risks from sovereign bond market tensions.
In its twice-yearly economic forecasts for countries of the 27-nation bloc, the European Union executive arm said economic growth in the 16 countries using the euro would be 0.9 percent this year, rather than 0.7 percent it forecast in February.
This is thanks to stronger global growth which is likely to drive demand for euro zone exports, the Commission said.
"We must now ensure that growth will not be derailed by risks related to financial stability," Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
"The EU recovery continues to be surrounded by high uncertainty, illustrated by the recent tensions in sovereign-bond markets," the Commission statement said, adding risks to the forecasts were broadly balanced.
Financial markets are concerned about the ability of Greece to service its large debt obligations and to overhaul its public finances and institutions.
Markets also warily eye other euro zone countries, such as Portugal, Spain and Ireland -- which have large budget deficits and relatievly low growth -- for signs of the Greek debt crisis spreading there.
"A successful completion of the financial support to Greece can be expected to increase investor and consumer confidence," the Commission said.
The euro zone's combined budget shortfall this year is likely to be 6.6 percent of the single currency area's gross domestic product rather than 6.9 percent forecast by the Commission in November last year, against 6.3 percent in 2009.
The aggregate deficit is to fall in 2011 to 6.1 percent of GDP, still more than twice the EU limit, the Commission said, as growth would accelerate to 1.5 percent next year.
Euro zone debt to GDP ratio is likely to reach 84.7 percent this year from 78.7 percent in 2009 and increase further to 88.5 percent in 2011, the Commission said, slightly raising its November 2009 forecasts.
But the cut-off date for data to the latest projections was April 20, which means they do not take into account the latest, higher than before estimates of Greek budget deficits and debt in the coming years.
The Commission forecast that Greece would have a budget deficit of 9.3 percent in 2010 and 9.9 percent in 2011 unless policies change, but on May 2 Greece announced an agreement with the euro zone in which it projects the deficits at 8.1 percent and 7.6 percent respectively.
The Commission said euro zone inflation -- which the European Central Bank wants to keep below but close to 2 percent over the medium term -- would be 1.5 percent this year and 1.7 percent in 2011. That is far below the ECB target.
Previously the Commission said euro zone inflation would be only 1.1 percent this year and 1.5 percent in 2011.
"The remaining slack in the economy is likely to keep both wage growth and inflation in check, partly offsetting an assumed increase in commodity prices," the Commission said.
(Reporting by Jan Strupczewski, editing by Timothy Heritage)