* Central bank hikes rates as expected by 25 basis points
* But cuts forecast for future hikes due uncertainty abroad
* Riksbank board split
* Crown falls against euro after decision, spreads tighten
(Adds quotes from press conference)
By Mia Shanley and Johan Sennero
STOCKHOLM, Oct 26 (Reuters) - Sweden's central bank raised interest rates as forecast on Tuesday but said growth concerns abroad meant future hikes could be more gradual than thought, reflecting divisions between policymakers and wrongfooting some analysts.
The 25 basis point increase in the repo rate to 1.0 percent was expected by 18 of 20 analysts polled by Reuters. Two analysts had seen no hike until December.
But the slower tightening path -- which came in spite of raised growth forecasts for Sweden's economy for this year and next -- drove the Swedish crown and debt yields lower.
The local currency has received a boost this year as Sweden became the only EU nation raising its main policy rates.
"The Swedish economy is growing quickly. It is also true that it will continue to grow rapidly and we ...see a stronger economic development in Sweden than in the U.S., euro-area," Governor Stefan Ingves told a news conference.
The central bank said in a statement the repo rate needed to be gradually raised in order to stabilise inflation close to the target of 2 percent and attain normal resource utilisation.
But weak developments overseas meant the rate did not need to rise as rapidly in coming years as it had previously anticipated.
"It is above all the global development, not least when it comes to rates," Ingves said.
Analysts said the reduced rate path was the main surprise in the announcement, though forward market rates had already been below the central bank's forecasts.
"This is a big step in a more dovish path for the Riksbank," said Elisabet Kopelman, an analyst at SEB.
"They are concerned about the development in the rest of the world and they have absorbed the signals from other central banks, which means that they will be more cautious in raising the repo rate further on."
Difference of opinion on the central bank's board contributed to the dovish message: one deputy governor who had earlier only advocated a lower rate path joined another in objecting to the latest rate rise.
SEB's Kopelman said, however, that the market is still pricing fewer hikes than the Riksbank.
"There is still a gap between the market and the Riksbank," she said. "The market believes the rate path will continue up to somewhere around 2.25 percent ...The Riksbank's new rate path shows they will peak at 3.50."
STRONG RECOVERY
After a contraction of around 5 percent in 2009 -- the steepest drop since World War Two -- Sweden has gradually raised rates from record lows in tandem with a brisk economic recovery.
The country's strong public finances stand in sharp contrast to many other parts of Europe, which are struggling to rein in bloated deficits and implement brutal spending cuts.
Domestic demand has been strong and house prices have continued to rise, and the Riksbank said it did not want imbalances to emerge in the economy.
Exporters such as telecoms giant Ericsson and Volvo, the world's second-biggest truck maker, have been rolling out robust quarterly figures.
Referring to key export markets, the central bank said the U.S. recovery would take time and that fiscal policy tightening measures were dampening growth in Europe.
This was leading to moderate inflationary pressures in an environment of low international interest rates.
The central bank therefore forecast an average quarterly repo rate of 2 percent at the end of 2011 rather than a previous 2.4 percent and saw rates on average at 2.9 percent by the end of 2012 rather than 3.3 percent.
"They obviously focused more on the low inflation and the strengthening of the crown also played a part," said Knut Hallberg, an analyst at Swedbank.
By 1032 GMT, the crown was down to about 9.28 to the euro from 9.17 prior to the rate decision, while spreads against German debt tightened.
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For a graphic measuring Riksbank rate and Swedish krona
Click on: http://r.reuters.com/kad32q
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Riksbank Deputy Governors Karolina Ekholm and Lars Svensson both entered reservations against the rate hike and the projected rate path.
They wanted a gradual rise in rates to 2.7 percent by the end of 2013, against the Riksbank's 3.4 percent outlook.
Despite its message of softer rates, the central bank raised its growth forecast for Sweden to 4.8 percent this year from 4.1 percent and to 3.8 percent from 3.5 percent for 2011. It cut its 2012 forecast to 2.5 percent from 2.6 percent.
For stories on Swedish interest rate decisions, click on