UPDATE 2-Czech FinMin hopeful on 2007 budget approval

(Writes through with background, new analyst quotes)

By Marek Petrus

PRAGUE, Oct 24 (Reuters) - The Czech 2007 draft budget looked likely to clear its first parliamentary hurdle on Tuesday after Finance Minister Vlastimil Tlusty said three opposition parties hinted they could vote for the minority cabinet's plan.

The budget draft, targeting a deficit of 91.3 billion crowns ($4 billion), is due to start its first of three readings in the lower house of parliament on Wednesday and support from opposition parties is needed for it to pass.

Civic Democrat Tlusty told the daily Pravo newspaper that the centrist Christian Democrats, the Greens and the Communists had signalled they may let the budget go through in the vote.

The three parties and Civic Democrats together have 126 deputies in the 200-member house.

"I am quite favourably surprised," Tlusty was quoted as saying in an interview. "(This) raises hopes for not only the budget but also for political and economic stability in the country."

The five-month-old parliamentary deadlock following a June election has fanned investor concerns that the country was unlikely to approve fundamental fiscal reforms needed to rein in a burgeoning budget deficit and prepare for euro adoption.

The cabinet of Civic Democrat Prime Minister Mirek Topolanek remains in power as a caretaker administration after losing a confidence vote in the lower house earlier this month, where right and left parties have the same number of seats as each other.

DEFICIT TARGET 'UNDER THREAT'

If no budget is approved by Jan. 1, public finances will have to follow a provisional budget, limiting the government's discretionary spending at the level of the previous year.

The Communists said this is what they wanted to avoid.

"So even if the state of public finances is chaotic, (the budget) must go through in the first reading," Communist Vice-Chairman Jiri Dolejs told Reuters.

But the Social Democrats, the second biggest party in the house after the Civic Democrats, remain opposed to the draft.

They have urged the government to drop a plan to sell a small stake in utility CEZ <CEZPsp.PR> to raise 31 billion crowns ($1.37 billion) needed to keep a lid on the deficit.

"If we find some suitable solution to the CEZ (stake) sale ... it would be possible to support the budget in both the first and final reading," Bohuslav Sobotka, Social Democrat deputy and former finance minister, told Pravo.

But analysts warned about a likely rise in the proposed deficit by up to 27 billion crowns if the parliament fails to delay spending increases on sickness benefits and the civil service.

"We'd argue that the ODS (Civic Democrats) cannot do without the 31 billion crowns from the sale of CEZ, given that the deficit target is already under threat as it is," said Francesca Beausang, analyst at 4Cast consultancy in London.

Budget revenue also faces a shortfall of as much as 5 billion crowns, according to the finance ministry, if the parliament curbs a proposed tobacco tax hike as of Jan. 1.

((For FACTBOX on budget forecasts and the process and timeline of approving a budget draft, double click on [ID:nL16534799]))

((Reporting by Marek Petrus and Jan Korselt; Editing by Gerrard Raven; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477))

($1=22.57 Czech Crown)

Keywords: ECONOMY CZECH BUDGET