* Coalition collapse would imperil economic rescue deal
* Failure of that deal could impact euro, Swedish crown (New throughout, adds quotes, analysis. Refiles to fix byline)
By Jorgen Johansson
RIGA, Aug 7 (Reuters) - Latvia's prime minister met his health minister on Friday for talks which sources said were aimed at solving a budget dispute that threatens to tear the coalition government apart and imperil an IMF rescue deal.
Health Minister Baiba Rozentale's People's Party, the largest partner in the centre-right coalition, has threatened to quit the government which is being squeezed to make big spending cuts during a severe recession.
In a newspaper published on Friday, People's Party leader Mareks Seglins said: "Our cooperation with (Prime Minister Valdis Dombrovskis' party) New Era could end in the foreseeable future."
"If New Era find it so difficult to work with us and we have this big nuisance, then let them work in a minority government," Seglins told Diena daily. The party's board would decide on the matter on Monday afternoon, he added.
Failure to pass the budget would imperil support from the International Monetary Fund and panic markets, pressuring and possibly breaking a euro currency peg -- a shock that could prompt a much wider sell-off across the region and continent.
The immediate threat of government collapse appeared to have receded after the talks with the prime minister.
"We have come to an understanding that over the next month and a half we need to come up with solutions in the health care sector," Rozentale told journalists after the meeting.
When asked about relations with the People's Party, Dombrovskis said: "In this situation the most important issue is to concentrate on finding solutions to the health care system."
People's Party spokesmen were not immediately available for comment on the outcome of the meeting.
PENSIONS, PAY CUT
Facing an 18 percent decline in gross domestic product this year, Latvia is dependent on a 7.5 billion-euro ($10.77 billion) rescue package arranged by the IMF to keep its economy afloat.
To receive further instalments, it must cut next year's budget deficit to 8.5 percent of GDP from an expected 10 percent this year -- a goal that will require severe spending cuts.
Finance Minister Einars Repse has said there must be 260 million lats ($531.4 million) of cuts in the 2010 budget.
Cuts of 500 million lats made to this year's budget meant a 10 percent reduction in pensions and public sector pay slashed by 20 percent. Rozentale has said Latvia's hospitals could go bankrupt by September or October without additional funds.
On July 27, her party refused to sign the IMF deal unlocking further instalments, but later backed down after talks with the prime minister and finance minister.
If the IMF pulls out, the European Commission might have to further increase its component of the joint IMF-European Union aid package. Otherwise Latvia would face a crisis that could ultimately undermine the Swedish crown and the euro.
Swedish banks dominate the Latvian banking sector, while Austrian and other EU-based banks dominate central and eastern Europe and would see a further soaring of defaults on foreign currency loans if the local currencies fell further.
"It is a risk that is clearly increasing," said Lars Christensen, head of emerging markets research at Danske Bank. "They still need the money from the IMF and if they cannot pass the budget it may not be delivered. Latvia desperately needs that money."
The lat, which is pegged to the euro with a 1 percent range, was quoted at 1350 GMT on Friday at 0.7015/7025 to the euro, close to the central rate of 0.7028. (Additional reporting by Peter Apps in London and Nerijus Adomaitis in Vilnius; editing by Robin Pomeroy)