Portugal to vote on bill that boosts deficit, markets wary

* Parliament to vote on bill that may increase deficit

* Government wants bill blocked

* Portuguese assets remain under pressure

LISBON, Feb 5 (Reuters) - Portugal's parliament will on Friday vote on an opposition-proposed bill that the government wants to block to avoid increasing the budget deficit, as it fights growing fiscal woes and Portuguese assets are pummelled.

The discussion in the house, which follows Thursday's approval of the bill in the budget and finance commission despite the minority Socialist government's attempts to stop it, is scheduled to begin at 1000 GMT.

Portuguese stocks that slumped around 5 percent on Thursday, were 2.6 percent lower in early trade on Friday, led by banks. Bond spreads that blew out over 15 points the previous day widened 3 basis points to 163 bps over the German bunds on the day.

Finance Minister Fernando Teixeira dos Santos urged the full house to vote against the bill late on Thursday, saying it would send the wrong signal to the market, and warned that he would use all legal and political means available to ensure the budget deficit was cut.

He said the government could apply a law on the budget framework to cut spending that breaks the limits set in its draft budget. This warning could jeopardise a shaky budget deal with the opposition, analysts said.

The centre-right PSD party had earlier agreed to abstain in the budget vote to allow its passage, but PSD parliament group's chief Jose Pedro Aguiar Branco criticised Teixeira dos Santos' stance as "threatening" and disproportionate.

He, however, made no reference to the budget deal. Prime Minister Jose Socrates met PSD leader Manuela Ferriera Leite late on Thursday, but no statements were made.

A spokesman for Prime Minister Jose Socrates denied on Thursday he had threatened to resign over the bill issue.

The political clash comes as Portuguese stocks and bonds are suffering from concerns over the fiscal challenges of debt-laden southern members of the euro zone.

"Every negative thing is of concern now in Portugal, so this vote adds to the pressure," said Wilson Chin, ING bond analyst in Amsterdam, adding though that Greece's underperformance was mainly pressuring euro zone peripheral countries.

Teixeira dos Santos said on Thursday that the regional financing bill would raise this year's projected budget deficit of 8.3 percent of gross domestic product. The government has pledged to cut the budget gap to below 3 percent of GDP by 2013. (Reporting by Andrei Khalip, Shrikesh Laxmidas; Editing by Andy Bruce)