* Govt says to cut deficit to 2.2 pct/GDP in 2013
* Cuts seen in pensions, drug costs; bank tax to remain
* To improve budget balance by HUF 900 bln in 2013 -minister
* Forint, bonds ease on lack of spending reform details
* OTP drops on extended bank tax, pharma stocks suffer
(Adds new detail, updates markets)
By Krisztina Than and Marton Dunai
BUDAPEST, March 1 (Reuters) - Hungary unveiled steps on Tuesday to cut its budget deficit and debt in a plan which should keep investors on board for the time being although its execution will be closely scrutinised.
Markets' initial reaction to the plans was slightly negative as investors had hoped the government would lay out detailed plans for structural reforms and were disappointed to find scant detail on how spending would be reduced.
However, the headline numbers and the cabinet's apparent willingness to tackle "sacred cows" in social spending such as disability pensions and early retirement was promising, analysts said.
"Although ambitious target saving numbers are announced, the plan does not include any concrete measures to support this but only deadlines by when the Economy Ministry will need to come up with concrete measures," said Gyula Toth at Unicredit.
Economy Minister Gyorgy Matolcsy said the government would take measures to improve the budget balance by 900 billion forints by 2013, and drive down public debt to 65-70 percent of GDP by the end of 2014 from around 80 percent now.
He said he expected the budget deficit to decline to 2.2 percent of GDP by 2013, below the European Union's 3 percent ceiling.
The centre-right government, which shocked stability-loving investors last year with unorthodox measures, has bought time to work out its plans in detail, and has probably averted a downgrade in Hungary's credit rating to "junk", analysts said.
But markets will closely follow the plan's implementation.
The forint has risen since December in anticipation of the reforms, which investors hoped would put the budget on a strong footing before "crisis" taxes imposed by the government expire in 2013.
Matolcsy said measures would include a review of disability pensions and early retirement -- taboo for many years -- as well as the state drug subsidy system, but would also include keeping the bank tax fully in place in 2012, contrary to earlier plans.
A document released on the government website kormany.hu revealed the cabinet targeted substantial savings from drug, pension, employment-related and public transport costs.
It also showed the government was not planning to use more proceeds from the sale of pension assets to plug budget holes in 2012-2014, after a one-off in 2011.
The forint eased to 272.70 to the euro by 1445 GMT from 270.80 and bond yields jumped 10 basis points on the long end, as lack of details on the exact measures disappointed markets, prompting profit taking after a recent rally.
Stocks of pharmaceutical firms Egis and Richter plunged on fears they will be hit by an expected cut in state drug subsidies, while OTP Bank sold off on news of a bank tax extension.
Analysts' initial reaction to the plan was mildly positive, with their focus mainly on the reduction of Hungary's debt, although some noted that implementation would carry risks.
"The size of the package is positive for investors -- even if it's partly optical tuning it could sell well to investors," said Matyas Kovacs, analyst at Raiffeisen.
"Its composition is less favourable as the bank tax will remain in place in 2012. And that the corporate tax rate will not be reduced in 2013-2014 could be another negative sign for investors," he added.
BOND SALE TO COME?
Prime Minister Viktor Orban's government roiled markets last year by eschewing International Monetary Fund advice in favour of cash-grabbing measures.
The government has promised to boost the economy and carry out long-overdue structural reforms to improve competitiveness.
Hungary plans total foreign currency bond issuance of 4 billion euros this year to finance expiring debt and repay 2 billion euros of a loan from the EU, and some analysts said the government could go ahead with a foreign currency bond issue soon after Tuesday's announcements.
All three credit rating agencies have said they could cut Hungary's debt to junk level from just above if the plan is not credible, so markets will be closely watching their assessment.
The government said the structural reforms and reduction in debt should lead to lower risk premia on Hungarian assets which should enable the central bank to lower its interest rates.
The ruling Fidesz party -- which is due to nominate four new rate setters for the Monetary Council by next week -- has criticised the bank for keeping rates too high. (Writing by Krisztina Than; editing by Stephen Nisbet)