UPDATE 1-Latvia recovery fragile, euro hurdles remain - IMF

* IMF says Latvia recovery fragile

* Needs to cut budget expenses more

* General govt deficit forecast to be 8.1 pct of GDP in 2010

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By Aija Braslina

RIGA, Aug 12 (Reuters) - Latvia needs additional budget cuts to regain competitiveness as its recovery remains fragile, the International Monetary Fund (IMF) said on Thursday.

"Although near-term vulnerabilities have declined substantially, the recovery is still fragile and significant medium-term challenges remain toward the goal of euro adoption," the IMF said in a statement.

Latvia was forced to take a 7.5 billion euro ($9.6 billion) rescue package led by the IMF to stabilise its finances as its economy sank into a deep recession.

The IMF welcomed the difficult fiscal and financial sector reforms, saying they had helped stabilise the economy after an 18 percent plunge in 2009.

However, the international lender emphasised that considerable fiscal adjustment was still needed, especially on the expenditure side, to preserve debt sustainability and lower the deficit in line with Maastricht criteria.

Under the bailout terms, Latvia has pledged to cut its budget deficit to 3 percent of gross domestic product (GDP) by 2012 to adopt the euro.

Latvia has pegged the lat to the euro and refused to devalue despite a contraction in the economy and soaring unemployment. Instead, it chose to implement an internal devaluation through hard austerity measures.

"Additional wage and price adjustment, together with structural reforms, would help close any remaining competitiveness gap, further enhance confidence in the quasi-currency board exchange rate regime," IMF said.

The IMF also emphasised the need to ensure that banks fully comply with regulations and maintain adequate provisioning against nonperforming loans.

EURO HURDLES

Latvia's economy expanded for the second consecutive quarter in April-June thanks to a global recovery and the IMF said positive annual growth was expected to return in 2011.

"However, growth is forecast to remain well below pre-crisis levels in the medium term," it said.

It also noted that Latvia faced a number of challenges to entrench stability, raise growth, and meet Maastricht criteria for euro adoption as quickly as possible.

According to the IMF these challenges include reducing very high unemployment, undertaking substantial additional fiscal adjustment and resolving a large private sector debt overhang that will inhibit growth.

It forecast Latvia's economy will contract by 3.5 percent this year and a budget deficit which will be 8.1 percent of GDP, little less than an agreed maximum deficit level of 8.5 percent of GDP.

(Reporting by Aija Braslina; Editing by Ron Askew)