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By Raushan Nurshayeva
ASTANA, April 1 (Reuters) - Kazakhstan's economy contracted by more than 1 percent in January compared to a year ago as the deepening financial crisis tightened its grip on Central Asia's biggest economy, the government said on Wednesday.
Kazakhstan's oil-fuelled economy nosedived sharply because of falling demand for its key commodity exports as well as turmoil in the banking sector which has forced the government to allocate $25 billion to rescue the troubled economy.
The government said it would take firmer control of the economy to steer it through the crisis, before reverting to more market-orientated principles when the outlook improves.
Prime Minister Karim Masimov, in a speech to parliament, said the former Soviet republic officially registered in January its first contraction since the crisis began.
"According to preliminary data GDP (gross domestic product) shrank 1.2 percent in January," he told lawmakers.
His adviser said the number reflected the change in output compared to January 2008.
Gross domestic product in the vast resource-rich nation east of the Caspian Sea grew 3.2 percent last year, and expanded at an average rate of about 10 percent in 2000-2007.
The government reiterated this week it sees this year's economic growth slowing to 1 percent. However, some economists have warned the economy has already started to slip into recession.
Masimov said market economy principles, embraced by Kazakhstan after its independence from the Soviet Union in 1991, had failed to adjust to a new economic environment and the government felt it necessary to step in by providing liquidity.
"We have decided to switch to a manual approach to running the economy," he said. "We did hope that many issues would be solved through market mechanisms but those did not work.
"When the crisis ends, the government will make a step back and allow the market to regulate everything itself again."
To combat the crisis, the government nationalised the
country's largest bank BTA
Kazakhstan's gold and forex reserves have declined by about $2.5 billion since September last year as the central bank struggled to prevent the domestic tenge currency from sliding.
It eventually devalued the tenge by a fifth in February.
Despite these efforts, the $100 billion economy, which has attracted about $50 billion in foreign investment since independence, remains in a dire state. Industrial output fell 3.2 percent in January-February from the same 2008 period.
The World Bank, echoing these concerns, has urged Kazakhstan to spend its stimulus package cautiously and said it might be a good idea to have a precautionary standby agreement with the International Monetary Fund (IMF).
Masimov said the government would cut budget spending to prevent the deficit from ballooning. He added that the state welfare fund Samruk-Kazyna, a key part of the economy, would lay off 50 percent of its staff at its head office and curb bonuses. (Writing by Maria Golovnina; Editing by Toby Chopra)