Stonewalled by lenders, Hungary must compromise to secure aid

* EU Commission set to announce legal action against Hungary

* Compromise needed for IMF/EU to budge on financial support

* No crunch yet but govt cannot go it alone for long -analyst

By Gergely Szakacs

BUDAPEST, Jan 17 (Reuters) - Hungary faces likely legal action by the European Commission on Tuesday against laws on its central bank and judiciary, with Budapest under pressure to meet EU demands if it wants to start talks on a new funding deal with international lenders.

The Commission is ready to start legal action against Hungary on Tuesday following its failure to offer amendments to the laws governing its central bank, appointment of judges and administration of its data authority, EU sources said on Monday.

While Hungary could offer last-minute concessions that might prevent the move, at this stage the Commission is ready to launch infringement proceedings against the Hungarian government, the sources said. The Commission will meet from around 1200 GMT to consider its decision.

It is up to Prime Minister Viktor Orban's government now to modify legislation in order to allow negotiations to start about a new financing deal, which Hungary needs to retain access to market funding, and avoid a full-blown market crisis.

With its economy headed into stagnation and investor confidence ruined by ad hoc measures that included Europe's highest financial sector tax, Hungary is again seeking financial help after its 2008 International Monetary Fund-led bailout.

The Commission has criticised Hungary's new central bank law, which lets Orban install a new deputy governor, a law forcing judges into early retirement and the reform of the national data protection authority, voicing "very serious" concerns that the laws may violate the EU treaty.

Orban said last week his government was open to discussing any law but wanted to hear specific arguments instead of political assessments.

The daily Nepszabadsag said over the weekend, citing sources close to the government, that if it was the price for a new funding deal with the IMF and EU, Orban was ready to give up the idea of expanding the Monetary Council - a move which lenders said could extend the government's influence over the bank.

Compromise over the new laws will be crucial for Hungary to secure an IMF/EU safety net to restore confidence as it prepares to roll over nearly 5 billion euros of external debt on top of forint bond expiries this year amid the euro zone's own debt crisis.

Hungary's foreign minister has said the government was willing to negotiate over the disputed laws, and would prefer that to an infringement process, which could see Hungary taken to the European Court of Justice.

The EU is concerned that the new legislation has jeopardised the independence of the central bank, forced hundreds of judges to retire early and left the Hungarian data authority open to political interference.

TIME PRESSURE

Hungary sold more debt than planned at an auction last week, but at yields above 9 percent, widely seen as unsustainable, while the forint is stuck on the weak side of 300 per euro after record lows hit this month on a string of ratings downgrades to "junk" debt status.

With parts of a $13 billion private pension transfer, which produced a one-off 2011 fiscal surplus, and some cash reserves still in government coffers, Hungary is under no immediate pressure to clinch a deal.

But given already high borrowing costs, reined in from double digits only after government pledges to seek a fast agreement with lenders, muddling through without a backstop is not an option, analysts said.

"Failure to reach an agreement would mean very serious trouble for Hungary," said analyst Zoltan Torok at Raiffeisen.

"In the short run, the government could probably continue to repay debt, but this is the short term, half a year, or a year, give or take. It can't afford to go it alone for the long haul."

Orban's point man with the International Monetary Fund, minister Tamas Fellegi, returned from Washington to Europe empty-handed last week despite a mandate to accept a stricter type of funding agreement than Budapest initially wanted.

Managing Director Christine Lagarde told Fellegi the IMF needed to see "tangible steps" by Hungary to show it is willing to follow policies that will help to stabilise its economy before talks could even start about a financing agreement.

Fellegi will also meet Economic and Monetary Affairs Commissioner Olli Rehn on Friday after warnings that the EU may step up deficit action against Hungary in 2013, possibly by freezing development funds, after years of missed budget goals. (Reporting by Gergely Szakacs and Krisztina Than; editing by Stephen Nisbet)