UPDATE 2-Czechs sounding sceptical on euro adoption in 2010

(Writes through with additional comments, analyst quote)

By Marek Petrus

PRAGUE, Sept 19 (Reuters) - The Czech Republic looks highly unlikely to adopt the euro in 2010 as planned in light of a burgeoning fiscal deficit and inflexible labour market, the country's central bank chief and prime minister said on Tuesday.

Central bank (CNB) Governor Zdenek Tuma and new rightist Prime Minister Mirek Topolanek joined a growing chorus of sceptics burying the target date set by the EU member country under the previous centre-left cabinet.

"Not much has been done in the area of public finance reform and the labour market, so the outlook for euro adoption in 2010 really does not look realistic," Tuma told reporters after meeting the premier officially for the first time since his appointment earlier this month.

Topolanek told the same briefing: "Our ambition to adopt the euro remains as strong as ever, but we do not dare to tell any date at the moment."

The government and the central bank were planning to issue a formal ruling after an annual joint assessment of the country's readiness to join the euro zone, to be completed in November.

Topolanek's minority cabinet lacks a parliamentary majority and is likely to lose a confidence vote due on Oct. 4, but it is widely expected to stay on for several more weeks pending talks on an alternative government.

Fading political will to hold the purse strings and slash budget deficits below the euro entry limit of 3 percent of gross domestic product has also cast doubt on the euro entry timetables of the Czech Republic's regional peers, Poland and Hungary.

Many analysts have previously voiced doubts that the Czechs could join Europe's single currency zone before around 2012. The crown was flat at 28.470 per euro <EURCZK=> after the comments.

ERM-2 IN 2007 "NOT REALISTIC"

So far, the country has aimed to yoke its currency to the single European currency within the pre-euro ERM-2 exchange rate system by mid-2007 to fulfil the minimum two-year period in the grid needed for EU clearance to join the euro in 2010.

Echoing earlier comments by Finance Minister Vlastimil Tlusty, Topolanek said growing doubts about feasibility of the euro adoption in 2010 precluded joining the ERM-2 next year.

"When saying 2010 (entry date) is hardly achievable ... then ERM-2 entry in 2007 is not realistic," he said.

"We know that we have to carry out a number of steps, such as increasing the mobility of labour force and flexibility of the labour market, and reforms of the expenditure side of the budget... to get public finances under control."

The Czech stance has been that spending more than two years with the crown locked within the ERM-2's exchange rate bands would be undesirable, as it could create confusion by giving the CNB another target to add to its existing inflation goal.

"In our view, a decision on the ERM-2 is a decision about the euro," said Tuma.

Many economists have said the scope of fiscal consolidation needed to bring the deficit within the 3 percent euro entry limit in time for euro adoption in 2010 is hard to achieve without a strong and reform-minded government in power.

"In a current situation of no strong government and the prospect of early elections, no unpopular measures to control spending, meaning a cut in the social promises, are likely to be undertaken," said Silja Sepping, analyst at Lehman Brothers.

The finance ministry expects the 2007 fiscal gap to widen to 4.6 percent of gross domestic product (GDP), well above the 3.3 percent target. The shortfall is forecast to stay above the 3 percent euro entry limit unless bloated welfare spending is cut.

(Additional reporting by Petra Vodstrcilova) ((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; Editing by David Christian-Edwards))

Keywords: ECONOMY CZECH EURO