* Latvian PM says agreement on budget cuts reached
* S&P puts Latvia credit rating on negative watch
* Swedish bank shares and crown surge
* Latvian currency hits four-month high against euro
(Adds EU quotes)
By Laura MacInnis and Patrick Lannin
RIGA, June 8 (Reuters) - Latvia's government and coalition partners agreed on Monday to slash the country's 2009 budget, a move that could help it secure more emergency loan funds and stave off pressure to devalue its currency.
News of the deal to cut 500 million lats ($978.9 million) in public spending caused a jump in the Swedish crown and Swedish banks, whose exposure to the Baltics has raised fears that a Latvian meltdown could have effects across the region.
Shares in Swedbank traded 8 percent higher and SEB was up nearly 9 percent in late-afternoon trade.
But in a sign that nervousness about Latvia remained, ratings agency Standard & Poor's placed Latvia's "BB-plus" long-term rating, which is already at junk level, on "CreditWatch" with negative implications.
Joaquin Almunia, European economic and monetary affairs commissioner, said the next instalment of aid to Latvia would depend on fiscal cuts.
"We are trying to support their efforts and we are ready to adopt the next instalment of our financial support provided the reforms needed and the adjustment needed will be adopted by their government and their parliament," he said after a meeting of Eurogroup finance ministers.
He said they had not discussed Latvia but a senior Eurogroup source said they had.
Latvian Prime Minister Valdis Dombrovskis told journalists that a meeting of government coalition parties, the president, social partners and central bank had agreed on 500 million lats of cuts which would be put into a second reading of the budget.
The government said in a statement it would hold a meeting on Tuesday on the budget cuts.
The Latvian government will meet on Tuesday to discuss the details of the budget cuts agreed to in principle on Monday, and to chart the way forward for the country that faces a near 20 percent shrinkage of its economy this year.
Worries about the drop in the economy have led to fears of a devaluation, which caused jitters in other markets last week.
But given a wave of central bank intervention, which has drained the local currency market of liquidity and caused interbank rates to soar, the lat firmed to a four-month high against the euro.
Investors have been concerned Latvia might not win access to the next instalment of its 7.5 billion euro ($10.4 billion) International Monetary Fund and European Union rescue loan, but one analyst said the jury would still be out on the lat even if further funding was agreed.
"We believe that (an IMF deal) is going to give some sort of indication of the future, but before that matter is resolved we are not able to make a judgment (about market conditions)," said Annika Lindblad, a Baltic analyst at Nordea bank.
S&P said its decision to place Latvia on credit watch, which could lead to a further downgrade in its long-term rating, was due to increased pressure on the sovereign's currency in the near term.
"Despite continued government efforts to contain the fiscal deficit and ensure the inflow of funds from multilateral lenders, we believe the likelihood of a currency adjustment in the next few months has substantially increased," S&P said.
Latvian officials have repeatedly said they will not devalue. The prime minister of neighbouring Estonia, Andrus Ansip, said in Stockholm: "I don't think that the Latvian lat will be devalued," adding this would only create more problems.
LAT GAINS
Dropping the currency peg would set back Latvia's goal of joining the euro zone and also inflict pain on its companies and citizens holding foreign-denominated loans.
It may also hurt the currencies of neighbours Estonia and Lithuania, though Ansip said he did not see this as the case.
Latvia's central bank said foreign exchange interventions rose last week to a new 2009 high of 237.3 million euros.
The interventions and tight money market helped the lat to firm, with the euro being quoted at 0.7050/60 lats by 1525 GMT.
The central bank, which has spent 907 million euros this year on propping up the lat, manages it within a 1 percent fluctuation band. The intervention benchmark is at 0.7098 lats.
Neil Shearing, an emerging Europe specialist at Capital Economics, said the lat strength did not negate concerns about Latvia, whose wages and asset prices soared during the global economic boom and then crashed when recession set in.
"They would benefit from a weaker exchange rate, and they may need one," he said, also cautioning after the statistics office reported Latvian consumer prices fell 0.5 percent in May that deflation must be carefully watched to avoid future damage.
"The bigger picture is that a number of countries have gone down this route of trying to adjust their exchange rate through prices and lower wages ... and basically failed," Shearing said, pointing to Venezuela and Peru in the mid-1980s as examples. (Editing by Stephen Nisbet and Dale Hudson)