* NIER sees growth of 4.2 pct in 2011, 3.1 pct in 2012
* Both forecasts higher than previous estimates
* Sees slightly higher repo rate vs Dec forecast
(Adds analyst comment, detail, background)
By Niklas Pollard and Daniel Dickson
STOCKHOLM, March 31 (Reuters) - Sweden's leading economic think tank raised its forecast for economic growth to 4.2 percent this year and 3.1 percent in 2012 and said it expected slightly higher interest rates than previously.
The National Institute of Economic Research's (NIER) estimates compared with a previous outlook, published in December, when it saw the economy growing 3.8 percent in 2011 and 2.9 percent in 2012.
Following a quick recovery from its worst downturn since World War 2, Sweden's economy grew at a record pace in the fourth quarter and expanded 5.5 percent for the full year, accelerating away from most of its European peers.
"The strong recovery of the Swedish economy is continuing, and the employment rate will rise to a level unsurpassed in 20 years," the institute said in a statement.
"Unemployment, however, will still be high. It will therefore be appropriate to keep monetary and fiscal policies expansionary," it added.
The institute, which supplies forecasts for the government, said it saw the central bank's key repo rate -- currently at 1.50 percent -- at 2.25 percent by the end of 2011. This compared with an end-2011 forecast of 2.0 percent in December.
"It is a very positive, bright picture of the Swedish economy. Inflation pressures will remain pretty low, so therefore the repo rate doesn't need to be raised that much in the coming years," Swedbank analyst Knut Hallberg said.
"We have a slightly more restrained view of comsumption in the coming years (than NIER). We believe higher mortgage rates will have a bigger impact."
NIER said it saw the repo rate rising to 3 percent by the end of next year.
But it said monetary as well as fiscal policy remained expansionary, with the government expected to roll out additional unfunded measures totalling 5 billion crowns this year and 25 billion in 2012.
It saw budget measures in 2012 being more focussed on tax cuts than expenditure rises.
(Editing by Patrick Graham)