* Kremlin aide says budget spending won't be cut
* Rouble briefly touches c.bank defence line
* Data points to biggest GDP contraction since Feb 1999
* Cbank may further hike rates to combat inflation
By Gleb Bryanski and Dmitry Sergeyev
MOSCOW, Feb 5 (Reuters) - Russia will adjust its budget but maintain high spending levels this year to stimulate the economy, a top Kremlin aide said on Thursday as data suggested the economy contracted at its fastest pace in a decade last month.
The central bank also pledged to defend the rouble as the currency briefly hit the bottom of the trading band. One bank official said it may further hike interest rates to combat inflation and help the currency stabilise.
VTB bank's GDP indicator, based on Purchasing Managers' Surveys (PMIs), showed the economy contracted in January at its fastest pace since February 1999, when Russia was coping with the aftermath of the 1998 financial crisis. [ID:nL4259001]
"There will be no cut in budget spending. A change in structure is possible... The budget will continue to play an active role in stimulating the economy," Kremlin aide Arkady Dvorkovich told a Troika Dialog investment conference.
The key anti-crisis planner in Vladimir Putin's government, First Deputy Premier Igot Shuvalov, told the same conference on Wednesday budget cuts could be made public on Thursday with regions and infrastructure projects getting less money.
But it was not clear if a government meeting on Thursday would discuss budget cuts, known as "sequestr" in Russia since the early 1990s, when the chaotic public finances under the late President Boris Yeltsin prompted regular annual cuts.
Russia is adjusting the budget for 2009 on an assumption of an oil price of $41 per barrel instead of the previous $95.
Fitch cut Russia's ratings on Wednesday [ID:nL4224470] saying it was concerned by corporate debt refinancing and macroeconomic problems which saw Russian reserves falling by over 40 percent since mid 2008 due to low oil prices, capital flight and spending to support the rouble and industries.
Reserves, still the world's third largest, rose $1.6 billion to $388.1 billion on Jan. 30, fresh data showed on Thursday.
Shuvalov has said Russia would conserve reserves by suspending its bailout of industries to defend macroeconomic stability.
Dvorkovich said budget spending would not change in nominal terms since the recent rouble devaluation would boost state revenues. He added the structure of spending would change to accommodate the government's anti-crisis package.
This could include the release of $40 billion to banks to revive stalled lending and support the shrinking economy, prevent heavy job losses and avoid a rise in social unrest.
The world's top aluminium producer RUSAL said on Thursday it would cut output this year due to low demand [ID:nMSK000294].
LAST DROP OF BLOOD
Dvorkovich said Russia could still afford to spend reserves to fund a budget deficit, which could come at 6 percent.
Chief Strategist at UralSib brokerage Chris Weafer said loosing another $60 billion of reserves may cost Russia its investment grade rating. Fitch and S&P rate Russia two notches into investment grade, and Moody's rates it three notches in.
"The market expectation is now focused on the risk of either formal capital controls or a free float (of the rouble) with a big hike in interest rates," said Weafer.
The rouble has weakened some 35 percent versus the dollar in the past six months due to capital outflows and low oil prices.
Russia has sought to put a floor under the depreciation, vowing to defend the rouble at 41 versus a euro-dollar basket.
On Thursday, the rouble briefly hit the bottom
"It can not only win (the battle), it also has the option to force the basket back down," said a dealer at a European bank in Moscow. The central bank said on Thursday it saw capital outflows slowing and pressure on the currency easing.
"I don't think the Bank of Russia will have to defend the band (of the corridor) of 41 to the last drop of blood," Sergei Shvetsov, head of the Central Bank's financial markets operations department, told the Troika forum.
He said Russia may further raise interest rates to fight inflation, which jumped to a three-year high of 2.4 percent in January, and stabilise the exchange rate of the rouble.
He also called on banks not to issue loans in foreign currency to non-exporters despite assurances the gradual devaluation of the rouble was over: "I urge you not to pass your foreign currency risks on to your clients". (Gleb Bryanski and Dmitry Sergeyev, writing by Dmitry Zhdannikov, Editing by Andy Bruce)