* Finance ministry reduces forecast contraction in 2009
* Shares rally, bond futures fall on less gloomy forecast
* Promises to continue expansionary policies
* But will withdraw such policies as economy recovers (Adds officials and analysts comments)
By Cheon Jong-woo and Seo Eun-kyung
SEOUL, June 25 (Reuters) - South Korea's finance ministry on Thursday released a less gloomy economic forecast for 2009 and pledged to maintain its expansionary policy stance to support recovery in Asia's fourth-largest economy.
But it also said it would withdraw its counter-crisis measures, which have included financial support for companies who create new jobs, in tandem with economic recovery.
The less gloomy economic forecast helped pushed shares higher and the ministry's remarks of an eventual exit from the expansionary policies knocked bond futures lower.
The Ministry of Strategy and Finance said the economy was expected to contract 1.5 percent this year, compared with a previous forecast of a 2.0 percent contraction.
"Our policy focus is still on economic recovery and there is no change in our stance. We will continue the expansionary policy in the second half," said Finance Minister Yoon Jeung-hyun at a press briefing.
He said that although the economy in the second quarter rebounded at a faster-than-expected clip due to pump-priming, he was not confident that the pace of recovery could be sustained well into the second half.
The economy skirted past a recession in the first quarter and data has suggested an improvement in economic conditions in the second quarter.
The ministry's revised forecast is one of the most optimistic predictions. The central bank expects a 2.4 percent fall in GDP and the Organisation for Economic Co-operation and Development (OECD) projected a 2.2 percent drop. [ID:nSEO179563]
The new forecast could mean job losses are limited to 150,000 in 2009 compared with a previous forecast of 200,000.
The ministry forecast a $25 billion current account surplus, above an earlier forecast for a $16 billion surplus.
The consumer price forecast was little changed at below 3.0 percent compared with 2.7 percent, previously.
The forecast comes after central bank data showed consumer sentiment in June rose for a third consecutive month to a near two-year high and nationwide land prices posted a second monthly gain in May. [ID:nSEO239612]
However, the projected economic contraction would still mark the worst annual performance since a 6.9 percent fall in GDP in 1998 at the height of the Asian financial crisis.
The forecast sparked a rally in shares. The main index
<.KS11> was up more than 2 percent while front-month treasury
bond futures
EXIT TIMING?
The finance ministry said it would gradually adjust its macroeconomic policy in line with any recovery and prepare for withdrawing the existing emergency measures when needed.
"I don't think interest rates will be raised this year as the current recovery is too fast to sustain, especially with major economies still in a slump," said Ryu Seung-sun, an economist at HMC Investment.
He projected the economy would grow more than 2 percent in the second quarter from the first, but would then quickly lose steam in the second half.
On Wednesday, a senior central bank official said the Bank of Korea had yet to shift its monetary policy toward tightening as the economy still faced uncertainty.
"The ministry's better economic outlook and their mentioning an exit plan scared many debt investors," said Jung Sung-min, a fixed-income analyst at Eugene Futures. "The debt market has been already pricing in a possible early rate increase."
The Bank of Korea held interest rates steady for a fourth consecutive month at a record low of 2.00 percent in June, after slashing the base rate by a total of 3.25 percentage points from early October until February to shore up the economy. The central bank next reviews rates on July 9.
Parliament approved fresh government spending of 17.2 trillion won ($13.40 billion) for this year to save jobs, and provide support for the poor and smaller companies in April. ($1=1283.1 Won) (Editing by Chris Lewis and Neil Fullick)