* IMF sees Greek '09 GDP shrinking 1-2 pct
* Says Greece needs immediate measures to cut deficit
* Budget gap to rise to 7 pct of GDP without new measures
ATHENS, May 25 (Reuters) - The IMF on Monday sharply cut its 2009 economic forecast for Greece and urged immediate spending cuts and collect more taxes to restore confidence.
The Greek economy will shrink by between 1 and 2 percent in 2009 before it starts recovering at the end of next year, the International Monetary Fund said in a statement, summing up the preliminary findings of a mission that visited Athens earlier this month.
In its world economic outlook in April, the fund had predicted the Greek economy would contract by 0.2 percent this year.
Monday's statement said spending cuts and higher tax revenues were needed to restore confidence in its economy and to prevent recession from swelling the public debt and deficit even further.
"If no further measures are taken, we estimate a (budget) deficit of at least 6 percent of GDP in 2009, rising to over 7 percent in 2010," the statement said.
Narrowing the deficit and reducing public debt is key to shore up investors' confidence, the IMF said.
"Greece needs a comprehensive medium-term policy programme to bolster confidence and boost potential growth," the report said.
The government should cut spending, abolish tax loopholes and drop its plans to gradually reduce corporate and income taxes over the next year, it added.
The IMF's calls come after the financial crisis shook investor confidence in the Greek economy. The premium Greece must pay on its bonds compared to higher-rated core European issuers like Germany rose to record levels earlier this year, adding further strain on government finances.
"Spreads are now easing, but a return to the low levels prior to the crisis is unlikely and risks of new spikes remain if policies are not strengthened," the IMF said.
Greece is the euro zone's second most indebted nation in terms of GDP. The European Commission expects Greece's debt to reach 103.4 percent of GDP this year and 108.0 percent next year. (Reporting by Harry Papachristou; editing by Stephen Nisbet)