FACTBOX-Key political risks to watch in Britain

LONDON, Sept 1 (Reuters) - British Prime Minister David Cameron's Conservative-Liberal Democrat coalition government has unveiled an austerity drive to cut a record budget deficit and announced electoral reform plans since coming to power in May.

An emergency budget in June kept market wolves at bay but, while Britain's economic recovery raced ahead in the first half of the year, there are legitimate concerns over a slowdown. That could spell serious trouble for deficit reduction.

The strength of the coalition partnership -- an unusual marriage of convenience in British politics -- is also likely to be tested properly in the coming months.

Details of where government spending cuts will fall are due in October and a potentially divisive referendum on changing the voting system is in the diary for May.

The ratings of the centre-left Lib Dems, the junior coalition partners, have dived since the May 6 election, suggesting their supporters may not be happy with their decision to join the centre-right Conservatives.

Below are the key political risks to watch.

THE COALITION AND THE DEFICIT

Credit ratings agencies have so far warmed to the tax hikes and steep spending cuts aimed at getting a budget deficit running close to 11 percent of national output under control.

The budget has been cited as one of the reasons why UK government bond yields are now at record lows.

But executing the plans will test the coalition and there is no guarantee that the administration -- the first partnership government since World War Two -- will last until the next poll, due in 2015, to see the cuts through.

The chances of a collapse this year are pretty slim but any delays or confusion over the details of spending cuts could put sterling under pressure and trigger a rise in gilt yields.

Worse could come if the global economy heads into another slowdown, as many analysts fear. Slower than expected growth will spoil the coalition's plan to all but eliminate the deficit by 2015 and raise questions about the wisdom of their approach.

The best outcome for markets would be for the coalition to last a full five-year term, cutting borrowing convincingly without tipping the economy back into recession or stagnation.

What to watch:

-- Indications of stable government for at least a couple of years to allow the coalition to get on with cutting the deficit. Investors will want to see how the leadership controls dissent over where cuts fall.

-- Economic data from across the world. The worse the global outlook gets, the harder it will get to sell spending cuts at home.

VOTING REFORM

Voting reform could prove critical to coalition survival.

The Conservatives don't want to change Britain's first-past-the-post voting system but it is a matter of urgency for the Lib Dems, whose parliamentary seat count does not reflect the party's performance in the popular vote.

Agreeing to hold a referendum next year was a deal-clincher for the Lib Dems in coalition talks, but has stirred up discontent among Conservative parliamentary backbenchers.

If the Lib Dems fail in their bid to bring in an Alternative Vote system, the party's grassroots supporters may start to wonder if life in a coalition government is really worth it.

If they succeed, Cameron may come under pressure from within his own Conservative party.

What to watch:

-- How the public reacts to different messages from the coalition on voting reform. How bitter the campaigning gets, potentially opening up cracks in the partnership.

THE LABOUR PARTY

In May, Labour crashed out of government after 13 years in office, leading commentators to argue the centre-left party was destined for a long spell in the political wilderness.

Former Prime Minister Gordon Brown stepped down in the aftermath of that defeat and the party is electing a new leader, with a winner to be announced in September. Front-runners include former cabinet ministers and brothers David and Ed Miliband.

With a new leader, there is a risk that the coalition could be facing a revitalised opposition just as it begins to outline detailed spending cuts.

Labour are specifically keen on targeting disaffected Lib Dems to weaken the coalition's resolve.

What to watch:

-- How quickly Labour galvanises behind its new leader. How successful the opposition is at exploiting any cracks in the coalition.

THE BANKS

The Bank of England will take over macroprudential regulation of the banks by 2012, with sovereign debt concerns and a continued dearth of credit likely to weigh on the financial sector for the foreseeable future.

The coalition has introduced a 0.07 percent bank levy on balance sheets without complete international approval. The tax will raise far less than had been speculated earlier this year.

But Lib Dem business secretary Vince Cable has warned banks further taxes could be on their way if they don't curtail bonuses and dividends and fail to boost lending to business.

What to watch:

-- An interim report on splitting banks is expected within a year. Any swift changes banks' structures are likely to hurt shares in banks such as Barclays (BARC.L) and HSBC (HSBA.L).

-- The sector will also be eager to see how Britain's central bank adapts to its regulatory powers.

EXTERNAL AND INTERNAL STRAINS

Cameron wants British combat troops out of Afghanistan within five years and an Afghan army in place that can take care of security.

Analysts are sceptical that this can be achieved, given the ongoing security problems on the ground. With the war growing increasingly unpopular at home, the government must deliver on its aim or risk losing support among middle ground voters.

The coalition might also face an upsurge in republican violence in Northern Ireland and some form of social unrest in Britain is almost inevitable as unionised workers in the public sector protest against big spending cuts.

Relations with the European Union will also test the coalition's mettle. The Conservatives are generally eurosceptic while the Lib Dems are committed fans of the European project.

What to watch:

-- Any worsening in relations with the EU could imperil Lib Dem support for the coalition.

-- How the unions react to public spending cuts.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Editing by Sonya Hepinstall)