* Economy expected to contract 8.3 percent in 2009
* Budget deficit seen improving in 2010
By Carmel Crimmins
DUBLIN, April 29 (Reuters) - Ireland's economy is expected to shrink by 11.6 percent between 2008 and 2010, the biggest contraction in an industrialised country since the Great Depression, a government-funded research body said on Wednesday.
Ireland is facing into a second straight year of record recession in 2009 as a double blow from a burst property bubble and global recession hit investment, consumption and exports.
The Economic and Social Research Institute (ESRI) slashed its forecast for this year's drop in gross domestic product (GDP) to 8.3 percent in its latest quarterly economic commentary, from a 3.9 percent reduction previously.
For next year, the ESRI forecasts a 1.1 percent contraction, resulting in a near 12 percent drop in GDP in 2008-2010, outpacing Finland's 11 percent fall in GDP between 1990 and 1993, which it said was the previous record contraction for a developed economy since the 1930s.
"Most of the incoming data in recent months has been more negative than even the most pessimistic expectations," the ESRI, which is independent but partly funded by the finance ministry, said in its report.
"The implications of the downturn for employment are highly negative."
The ESRI said it expected unemployment to average 13.2 percent this year, rising to 16.8 percent next year, resulting in 366,000 people on the dole.
While other nations are pump-priming their economies to help them through the global slump, Ireland has been forced to tighten the screws as its over-reliance on a booming property market left its budget deficit ballooning when the bubble burst.
Even with tax hikes and spending cuts in an emergency budget in April, the ESRI expects Ireland's budget deficit to hit 12 percent of GDP this year, four times an EU limit, before improving slightly to 11.5 percent in 2010.
The government has said it expects its shortfall to hit 10.75 percent of GDP this year and next.
"I think on the fiscal side, the measures taken in April were positive in the sense that it did send a signal of a government that has diagnosed the problem and was willing to tackle it," said Alan Barrett, one of the authors of the report.
The ESRI also welcomed government efforts to deal with tens of billions of euros in risky property loans which have paralysed the banking sector and added to the state's financial woes after Dublin guaranteed all banking liabilities last year.
The government is working on the creation of a "bad bank" to buy up to 90 billion euros worth of property assets from the banks at an undisclosed discount. The transfer will lead to a significant jump in the national debt.
Dublin has warned that it may end up with a majority stake
in Allied Irish Banks
Barrett said from a personal perspective he preferred nationalising the banks, which would immediately clear up uncertainty about their future rather than the "bad bank" plan, which still left question marks.
"If you are on this continual process of injecting more and more money would you not be better short circuiting the entire situation and just going for nationalisation?"
He added, however, that he would have concerns about the potential "politicisation" of the banking system from nationalisation.
Recently, 20 leading academic economists wrote an opinion piece calling for nationalisation. [LH543086]
(Reporting by Carmel Crimmins; Editing by Victoria Main)