* Latvian currency hits four-month high against euro
* Higher interest rates, shifting sentiment help lat
* Finance minister says more budget cuts needed
(Adds lat strengthening, quotes from traders, finance minister)
By Laura MacInnis
RIGA, June 8 (Reuters) - Latvia's currency stretched to a four-month high against the euro on Monday after interventions by the central bank, but devaluation fears in the economically battered Baltic country still weighed on markets.
All eyes are on Latvia's efforts to get more loans from the International Monetary Fund (IMF) and European Union (EU) to avoid bankruptcy and the finance minister said budget cuts could amount to 1.5 billion Latvian lats over the next few years.
The authorities have strongly denied any plans for a devaluation. But, showing the strains on the authorities to keep the currency peg, the central bank said its foreign exchange market interventions rose to a new high for the year last week when it sold 237.3 million euros ($331.3 million).
The bank, which announces interventions every Monday, including on Reuters page, sold 134.5 million euros the week before. It has now spent 907 million euros this year on supporting the lat. Last week it said its foreign currency reserves as of the end of May were 2.97 billion euros.
Traders said higher interest rates and shifting sentiment in the tight money market had pushed the lat to its highest rate since Feb. 12, though they noted that trade was thin.
By 0940 GMT, the euro was quoted at 0.7055/65 lats, well above the central bank's intervention benchmark of 0.7098 lats.
"Sentiment in the market is more that the lat should strengthen," said one trader.
He said there was no sign of the Treasury making euro sales to prop up the currency, which is pegged to the euro at a central rate with a 1 percent fluctuation band.
HARSH BUDGET CUTS
Fears Latvia could drop its euro peg to help weather a double-digit percentage fall in economic output caused jitters in eastern European markets and Sweden last week.
Those fears overshadowed trade in eastern European currencies on Monday, dealers said. Shares in Swedish bank Swedbank also fell a further 3.8 percent and rival SEB was down 1.4 percent.
Worries about Swedish banks have been high due to their exposure to the recession-hit Baltic economies.
The government's strategy to win further funding from a 7.5 billion euro IMF-led rescue package agreed last year is to reduce its budget deficit via spending cuts, despite the fact the country faces a near 20 percent economic drop this year.
Finance Minister Einars Repse was quoted by Baltic news agency BNS as saying the state budget would need to trim another 1.5 billion lats ($2.95 billion) over the next few years to 2011, in addition to already-announced spending cuts.
The comments were the clearest estimate yet from the government of the size of the adjustment needed and came just after local and European Parliament elections at which opposition parties did well.
Interbank market rates hit a new high on Monday, quoted at 16.80/21.60.
Reuters data showed banks on Monday were offering rates varying from 9.0/14.0 percent to 13/16 percent, though one bank, Nordea, was showing a lat deposit rate of 31.0/34.50 percent.
Latvia five-year credit default swaps, used to protect against default of debt, rose 20 basis points from Friday's U.S. close to 745 bps.
Inflation data on Monday showed consumer prices fell 0.5 percent in May from April for a year-on-year inflation rate of 4.7 percent, down from 6.2 percent and from double digits in 2008. (Reporting by Laura MacInnis and Patrick Lannin; editing by Stephen Nisbet)