(Recasts with Eurogroup news conference)
By Dave Graham and Anna Willard
BRUSSELS, Nov 3 (Reuters) - Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation.
"This is not the time to let the deficits rip," said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area.
"We don't want to indulge in an orgy of spending and indebtedness -- in essence, mortgaging future generations," he told a news conference after their Monday talks.
The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change.
They also supported the Commission's estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone.
But while a general revival package for the whole euro zone was unnecessary, upholding public demand through targeted, short-term measures was crucial, Luxembourg's Juncker said.
"Growth is not being fuelled by private consumption or investment but by public demand," Juncker said. "It is a question of organising public demand in an orderly fashion.
"Public investment should continue to be at a high level. (Governments can use) fiscal or budgetary means to support short-term positive developments," he said.
Almunia welcomed the ministers' agreement to abide by the EU budget rules, the Stability and Growth Pact. He called it much-needed cooperation on the real economy, like earlier agreed measures to restore confidence in the banking system.
"There is a 100 percent consensus to implement the pact under these difficult circumstances," Almunia said.
"This is an extremely good substance of cooperation that there is peer support for those who had budgetary difficulties and peer pressure for those who have not decided yet how to comply with the Stability and Growth Pact," Almunia said.
The pact says EU countries should not run budget deficits higher than 3 percent of GDP or they will face disciplinary steps that could result in fines.
But it also says that in tough economic times, countries may take longer to bring such a shortfall back in line.
The Commission, executive arm of the European Union, encouraged those EU countries which had budgetary room for manoeuvre to make full use of the flexibility to cushion the economic slowdown.
OUTRIGHT EURO ZONE RECESSION POSSIBLE
The slowdown will boost unemployment to 8.4 percent of the workforce next year from 7.6 percent seen this year and to 8.7 percent in 2010, the Commission said.
It said EU economies had been hit by the financial crisis which was aggravating a housing-market correction in several countries during a time of rapidly fading external demand.
The Commission estimates that euro zone GDP fell 0.1 percent in the third quarter of 2008 after a 0.2 percent contraction in the second, adding up to two consecutive quarters of negative growth -- a common definition of technical recession.
The economy is to shrink 0.1 percent in quarterly terms in the fourth quarter, it said, and warned that further worsening in financial markets could push the euro zone into outright recession.
"A relatively moderate, 50-basis point, further increase in risk premium and a tightening of credit availability for households, not any longer a remote possibility, can trigger an outright recession -- a decline of 1 percent in GDP in 2009 -- in the euro area," the Commission said.
The Commission expects that the euro zone's three biggest economies, Germany, France and Italy, will stagnate next year while those of Ireland and Spain contract.
U.S. OUTLOOK WORSE
The euro zone outlook is still better than for the United States, whose economy the Commission forecasts to shrink 0.5 percent next year. The EU executive expects Japan to contract by 0.4 percent in 2009.
In the wider European Union, Britain's economy is seen shrinking 1 percent next year, the Baltic states of Estonia and Latvia will contract this year and next, and Lithuania will shrink in 2010, the forecasts showed.
Euro zone inflation is likely to slow to 2.2 percent next year from 3.5 percent seen this year and decelerate further to 2.1 percent in 2010, the Commission forecast.
The European Central Bank wants inflation to be just below 2 percent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to mid-2008.
The bank has signalled it may cut interest rates in November as inflation risks have diminished, a prospect welcomed on Monday by BusinessEurope, an umbrella organisation for some 20 million European companies. (Writing by Jan Strupczewski, editing by Dale Hudson)