UPDATE 1-Latvian PM-designate forms new coalition government

(Adds quotes on vote, economy)

RIGA, March 11 (Reuters) - Latvia's prime-minister designate formed a new coalition government on Wednesday to guide the Baltic state through deep economic crisis.

The government, to be led by former Finance Minister Valdis Dombrovskis, must make futher painful budget cuts to ensure Latvia receives more funds from a 7.5 billion-euro ($9.57-billion) rescue package agreed with the International Monetary Fund and the European Union.

Dombrovskis, 37, of centre-right opposition party New Era, has formed a coalition with the four parties in the government that collapsed last month due to the crisis, along with a smaller centre-right group.

The parties finalised and signed a government declaration on Wednesday. The final formal hurdle is a parliamentary confidence vote on Thursday. The session on the vote is to start at 1 p.m. (1100 GMT).

"The vote will go as foreseen, we will have this coalition support," Dombrovskis told Reuters after the parties signed the coalition agreement. The parties have 64 seats in the 100-seat parliament.

"Our country is experiencing a systemic crisis ... The state's financial resources will be limited in the near term so further cuts in state spending have to be achieved," said the government declaration.

The declaration stuck to a date of 2012 as a target to adopt the euro and pledged a tougher fiscal policy in the future.

Latvia's woes were highlighted by new data showing the economy shrank 4.6 percent in 2008 after a more than 10 percent slump in the last quarter of last year, the worst performance since 1995.

The Finance Ministry has forecast an even worse drop of 12 percent this year and Dombrosvkis said the recession could become deeper still.

A key goal for Dombrovskis, who was finance minister in a New Era government between 2002 and 2004 and most recently a member of the European Parliament, is to ask for leeway from the International Monetary Fund and European Union on budget cuts.

Under the rescue deal, Latvia should keep its budget deficit to within 5 percent of gross domestic product (GDP) this year.

Dombrovskis says the crisis has since worsened and that the cuts needed to stick to a 5 percent deficit limit would be too drastic. He wants the IMF and EU to permit a deficit of 7 percent of GDP.

He said on Wednesday his government would start talks on the issue with the IMF and EU next week. [nLB954277] (Reporting by Patrick Lannin; editing by Andrew Roche)