* Govt controls 55 of 100 seats in assembly after election
* Challenges ahead to cut budget, meet IMF, euro entry goals
* Will begin work on 2011 budget next week
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By Aija Braslina
RIGA, Nov 3 (Reuters) - Latvia's parliament approved on Wednesday a second term for Prime Minister Valdis Dombrovskis as he seeks to push through harsh budget cuts to restore economic health under the terms of an international bailout plan.
Latvia's economy contracted by 18 percent last year, making it the worst-affected in Europe by the global downturn.
To stabilise its finances Latvia secured a 7.5-billion-euro ($10.5 billion) rescue package led by the International Monetary Fund and the European Union, under which it pledged to implement harsh austerity measures.
"There are hard and unpopular decisions ahead for the next government," Dombrovskis told parliament.
"A vote to approve the government is also a decision about further implementation and successful completion of Latvia's economic stabilisation programme."
His previous government slashed public sector pay by 50 percent, reduced pensions and closed hospitals and schools to bring government finances under control.
The economy is now recovering and ratings agency Fitch recently upgraded its credit rating outlook. But the new government still needs to bring down spending.
The first priority for the new government, which controls 55 seats in the 100-seat assembly after the Oct. 2 election, will be to draft a 2011 budget which could include cuts of around 400 million lats ($790 million).
"We will start work on the budget already next week," Dombrovskis told journalists after getting the nod from parliament.
He said the latest batch of macroeconomic data will be released next week, after which the government will be able to decide how much it has to cut to bring the budget deficit down to 6 percent of gross domestic product (GDP) from a planned 8.5 percent this year.
Dombrovskis said the government would cut the budget deficit further to 3 percent of gross domestic product by 2012 as it aims to join the eurozone in 2014.
The road ahead is likely to be tough.
"This partnership for both -- Unity bloc and Union of Farmers and Greens -- will be hard because 55 seats is a slim majority," Unity bloc board member Dzintars Zakis told journalists on Wednesday.
However, opposition parties have said they may back some of the government's initiatives. The Nationalist bloc, with eight seats in parliament, said in a press release they supported Dombrovskis and the targets set by the new government. (Editing by Charles Dick)