* Latvian government meets over painful budget cuts
* Prime minister says IMF to wait before approving aid
* Slashed spending could cut wages, spark political backlash
* Pressure for currency devaluation expected to ease
(Recasts with details on budget-cutting package)
By Patrick Lannin and Jorgen Johansson
RIGA, June 9 (Reuters) - The International Monetary Fund is unlikely to give more money to Latvia until painful budget cuts that could slash salaries and pensions are passed by parliament, the country's prime minister said on Tuesday.
Faced with double-digit economic contraction, Latvian officials have agreed to chop spending by some 10 percent of gross domestic product to secure the next tranche of a 7.5 billion euro ($10.41 billion) IMF-backed rescue package and avoid having to devalue the euro-pegged lat currency.
Strains on the small Baltic economy are being watched with worry by Sweden, whose banks pumped credit into Latvia during its boom, and by fellow European Union members which fear knock-on effects from Latvian currency failure or public unrest.
Prime Minister Valdis Dombrovskis said that a government agreement to cut 500 million lats ($987.6 million) in spending this year, which could shrink salaries and pensions, would need to be formalised before the IMF frees up more funds.
"I think they will wait for approval (in parliament) as it is a quite clear commitment," he told Reuters ahead of a cabinet meeting in Riga.
Dombrovskis later told reporters that he saw a "good chance" of getting more IMF and European Union loan funds as a result of the spending cuts, which he said aimed to get the Latvian budget deficit to 3 percent of GDP in the medium-term.
A second reading of Latvia's budget will take place on June 12, with a final discussion and vote on June 17.
Optimism about the government's budget-cutting prospects helped ease the market jitters that have clouded currency markets in the region in recent weeks.
The lat strengthened to its highest rate against the euro since early February, with the euro trading at 0.7000/10 lats at 1050 GMT. The Latvian central bank normally intervenes to keep the rate between 0.6958 and 0.7098.
The Swedish crown and eastern European currencies also rallied on signs the government may have found a way to avoid dropping the euro peg, a move which could deal a blow to Swedish banks and Latvians who used foreign-denominated debt to buy fancy cars and apartments in a heady consumer boom.
The evaporation of that credit with the broad economic downturn drove imports down 35 percent in the first quarter of 2009, compared to the same period last year, and shrank overall output by 18 percent.
Economists warn a backlash could follow the 500 million lat budget cut that Dombrovskis confirmed on Tuesday won approval from the Latvian cabinet, especially if they weaken schools, hospitals and social services in the midst of the country's worst economic crisis since the collapse of the Soviet Union.
THREAT OF UNREST?
Though "for rent" signs have become ubiquitous around the capital Riga, life is proceeding close to normal for many Latvians, who are continuing to eat out in restaurants, socialise in beer gardens, and dance in nightclubs.
But further pressure on people who had a taste of wealth at the height of the global boom could lead to trouble. Only five months ago, a 10,000-person protest over wage cuts turned into a riot, and unemployment benefits are due to expire for many in the months ahead.
"Further fiscal austerity for an economy which is already expected to contract by 15 to 20 percent will arguably only make the real economy situation more difficult," said Timothy Ash of the Royal Bank of Scotland, who estimated the proposed cuts represent 3.5 percent of Latvian output.
Martin Blum of Unicredit cited risks of protests or parliamentary resistance to the "radical spending cuts", which he said could represent more than 20 percent of non-social security government spending on a half-year basis.
But he said the government's efforts should reduce market-rattling devaluation fears in the coming days.
In Luxembourg, Latvian Finance Minister Einars Repse sought to erase any doubts about the viability of the budget cut plan which was agreed by the government, coalition parties, president and central bank chief on Monday.
"We will be cutting no less than 10 percent of our GDP over three years but this will bring our imbalances down and pave a very solid basis for recovery," he told Reuters.
Asked if there were any plans to devalue, he said: "This is absolutely out of the question. Never discussed."
Greek Finance Minister Yannis Papathanassiou said the EU was ready to stand by Latvia, which joined the bloc in 2004 but remains outside the euro zone.
"The situation in Latvia is difficult. The EU will show solidarity as much as it can," he told reporters during the Luxembourg meeting of EU finance ministers.
Swedish Prime Minister Fredrik Reinfeldt also sought to negate concerns about the wider impact of Latvia's plight.
"I am convinced we have taken steps that we can control anything that happens in Latvia, and that it will not have a huge effect on the Swedish economy and that we will not send the bill to Swedish taxpayers," he told reporters in Brussels.
An auction of one-month Latvian treasury notes, worth 15 million lats, is due to take place on Wednesday and could prove a key test of market sentiment in the wake of the budget decision. (Additional reporting by Anna Willard and Marcin Grajewski in Luxembourg and Timothy Heritage in Brussels, writing by Laura MacInnis, editing by Stephen Nisbet)