(Adds quotes on currency, further budget talks)
By Jorgen Johansson and Patrick Lannin
RIGA, June 1 (Reuters) - Latvia has drawn up a 2009 budget that foresees a 9 percent deficit and an 18 percent shrinkage in GDP, but the prime minister on Monday rejected any devaluation and promised to consider more spending cuts to win vital loans.
The country's economic crisis has steadily deepened and one government minister said the impact of a devaluation favoured by some should be looked at. But Prime Minister Valdis Dombrovskis said the lat's peg to the euro was not up for review.
"We have a bigger budget deficit, but it is more realistic," said Finance Minister Einars Repse after the government decided to send the 2009 budget for a first parliament reading with a public sector budget deficit target of 9.2 percent of GDP.
This includes an 8.2 percent central government gap, or about 1 billion lats ($2.01 billion), versus a previously forecast 7 percent, and a 1 percent spending gap for local authorities, though the Finance Ministry said this could be revised also.
Repse said the government would between the first and second reading of the budget propose more cuts to lower the deficit.
Dombrovskis told a news conference further cuts would be discussed with the International Monetary Fund (IMF) and European Union (EU), which last year led the drawing up of a rescue package worth 7.5 billion euros.
The amended 2009 budget includes a general public sector salary cut of 20 percent amid overall spending reductions of 40 percent.
Dombrovskis has said Latvia will be bankrupt if it fails to get a next loan tranche of about 1 billion euros.
His four-party coalition has been forced into round after round of budget cuts to meet the terms of the rescue as the economy has worsened, pushing down revenue forecasts.
The rescue was agreed using a forecast GDP drop of 5 percent, revised to a 12 percent fall and now to 18 percent.
DEVALUATION FEARS
The woes of the Baltic states, particularly Latvia, have created jitters in Sweden, and the crown and Swedish bank shares last week fell due to fears of their exposure to the region.
Former Prime Minister Andris Skele has said Latvia should devalue its currency by 30 percent to help boost exports and avoid further damaging budget cuts.
On Monday, Justice Minister Marek Seglins, a member of the largest coalition party the People's Party, in which Skele plays a leading role, said he was not calling for devaluation, but added: "That much-mentioned lat devaluation has never been analysed, that has to be done," Seglins told Latvian radio.
Dombrovskis, of centre-right party New Era, rejected this.
"We are not looking at a lat devaluation, we are only looking at budget amendments," he told the news conference.
The budget talks have been held amid political tension ahead of local elections on June 6, the same day as EU Parliament elections. Polls show Seglins' party is facing a heavy defeat and that New Era would perform much better.
The second reading of the budget will be presented to parliament after the elections.
The central bank, which last week spent 134 million euros to support the lat currency, its highest intervention this year, has also strongly rejected a devaluation. (writing by Patrick Lannin, editing by Stephen Nisbet)