UPDATE 1-Baltic crisis eased but tough road ahead -IMF

* Baltic states' prospects better, tied to export growth

* Latvia faces elections on October 2

* New government will have to cut deficit further, IMF says

(Adds quotes on Latvia, background)

By Aija Braslina

RIGA, AUG 26 (Reuters) - The economic crisis in the Baltics, which suffered the European Union's worst recessions last year, is easing and the region's growth prospects are looking up, the International Monetary Fund said on Thursday.

But the pace of expansion will depend on how quickly the trio of states, which are still feeling the effects of a painful fiscal adjustment, can develop their export sectors and further improve their competitiveness, a senior IMF official said.

The Baltics suffered badly in the aftermath of the financial crisis, leaving Nordic banks like Swedbank (SWEDa.ST) and SEB (SEBa.ST) nursing steep losses in the region.

"The Baltic countries have turned the corner... have bottomed out," Mark Allen, senior IMF resident representative for Central and Eastern Europe, told a conference.

"Growth prospects will depend on how well these countries can shift to a more export-oriented model," he said at the Baltic mergers and acquisitions and private equity forum.

The future would be challenging as households were in a difficult position due to unemployment and deleveraging and the corporate sector also faced problems.

"There is a further fiscal adjustment going on and there is going to be a shortage of bank capital," Allen said.

He said Latvia, Estonia and Lithuania should make sure wages do not rise faster than productivity, that business is not taxed excessively, that public finances are kept tight and that prices do not rise faster at home than abroad.

All three nations declined to devalue their currencies in the face of the recession, which would have boosted competitiveness. Instead, they cut wages and spending in austerity packages to achieve the same end.

Latvia also had to take a 7.5 billion euro bailout, led by the International Monetary Fund and the European Commission.

LATVIA ELECTIONS

Under the bailout programme, Latvia has to cut its budget deficit to 3 percent of gross domestic product (GDP) by 2012, mostly by taking new austerity measures.

But the government of Prime Minister Valdis Dombrovskis faces an election on October 2 and the political situation remains tough. Some opposition parties have called for the deal with the IMF to be re-negotiated.

"We think that what has been done here by the current government has been very impressive and we would not like to see that reversed," Allen told Reuters.

But Latvia needed further action on fiscal policy to bring the deficit down and prevent the debt from growing.

"We are looking forward to working with whatever government results from these elections," Allen said.

(Reporting by Aija Braslina; Editing by John Stonestreet)