UPDATE 4-Plunge in steel demand pushes Ukraine towards recession

(Adds Ukraine steel industry details)

By Sabina Zawadzki

KIEV, Nov 12 (Reuters) - Ukraine's industrial output plunged 20 percent in October, the sharpest drop since early post-Soviet days, highlighting a decline in world demand for the country's key export steel and drawing it closer to a recession next year.

Ukraine agreed a $16.5 billion loan from the IMF as its currency slumped to a historic low last month. But after the output figures, analysts question whether that higher-than-expected amount will be enough to stop Ukraine's economy freefalling.

Political instability, almost constant since the 2004 "Orange Revolution" brought pro-Western politicians to power, showed little signs of abating. President Viktor Yushchenko acknowledged that a snap poll he called would not take place by the end of the year and parliament sacked its chairman.

Data released on Wednesday showed industrial output plunging 19.8 percent year on-year. Coke production and oil refining fell 43.9 percent and metals production fell 35.6 percent.

"We have never seen industrial output falling month-on-month in October," Valery Lytvytsky, top adviser to the central bank, told Reuters. "In January, we will have not a technical, but a fully-fledged recession in our industry."

The sharp downturn was led by the steel industry, the world's eighth largest, which has been brought to its knees in the past month as the global economic slowdown gathers pace.

Ukrainian producers reduced rolled steel output by 26.1 percent in October compared to September as global prices and demand slumped, while pig iron production fell by 26.7 percent.

The economy has grown on average a robust 7 percent every year since 2000, boosted by higher steel prices and domestic demand as consumers began to get richer.

But the first decade after the collapse of Soviet rule was chaotic -- gross domestic product lost over 50 percent of its Soviet-era value. Hyperinflation and a currency crisis decimated savings and plunged consumers into poverty.

Signs of discontent have begun to reappear. Companies have begun making redundancies, wage arrears have risen significantly and transport workers in Kiev have threatened to strike.

SEVERE PROBLEMS

The International Monetary Fund -- which has just given Ukraine the first $4.5 billion tranche from the standby loan - said last week it saw the economy shrinking 3 percent next year after predicting only a month earlier growth of 2.5 percent.

But politicians have been distracted by the battle between Yushchenko and his former ally Prime Minister Yulia Tymoshenko.

He called an early parliamentary election in September, abandoning efforts to form a new ruling coalition. The premier opposed the election, pointing to the effects of the crisis.

The IMF loan was delayed for two weeks as Tymoshenko's supporters in parliament blockaded the chamber to denounce any attempt to link a package of anti-crisis measures, needed to secure the IMF funds, to financing for the election.

On Wednesday, parliament voted to dismiss its chairman and ally of Yushchenko, Arseniy Yatsenyuk, but not before some members engaged in fistfights, breaking a glass panel.

"I'm not sure if the government and parliament are realising the severity of the economic problem," said Zsolt Papp, chief economist at KBC Investment, adding he would consider lowering his 2009 economy forecast from a current "stagnation" scenario.

"If this (output) number becomes the established trend, then questions will arise whether the $16.5 billion package will be actually enough. The data puts the whole Ukrainian situation in a completely different light."

Ukraine requested the loan from the IMF as the hryvnia, weighed down by a fast-expanding current account deficit, plunged to a historic low of 7.05-7.2 to the dollar. Yushchenko said imports should be cut to help the deficit.

"We can live without expensive foreign cars, television sets and household appliances ... We must protect the national economy," he told a meeting of businessmen and bankers. (Additional reporting by Natalya Zinets; Editing by Ruth Pitchford)