UPDATE 2-Greek economy to contract in 2013, recover next yr -cenbank
* Bank of Greece sticks to -4.5 pct 2013 GDP forecast
* Central bank chief urges strict adherence to bailout targets
* Expects return to growth in 2014
ATHENS, Feb 25 (Reuters) - Greece's economy will keep shrinking this year before it starts recovering in 2014, central bank chief George Provopoulos said on Monday, urging the government to keep up its reforms and stick to its fiscal targets.
Greece's economy has contracted about 20 percent since the recession began in 2008, with the downturn exacerbated by the fiscal austerity demanded by its international lenders in return for a bailout to rescue it from bankruptcy.
"There is no doubt that 2013 will be a difficult year," the Bank of Greece chief told the bank's shareholders meeting.
The central bank stuck to its forecast for a 4.5 percent contraction in national output this year, in line with government and EU Commission projections.
Provopoulos, also a European Central Bank Governing Council member, said the recession should not be used as an excuse to ease up on economic reform efforts. That would risk undermining improved confidence among investors and Greece's international lenders won through painful sacrifices, he said.
"Strict adherence to the targets will ensure continued funding and eliminate once and for all the risk of exit from the euro area, attract new investment and convey a clear message that the worst is behind us," he said.
His views were echoed by Finance Minister Yannis Stournaras who stressed the need to not let up on fiscal adjustment efforts.
"We have covered two-thirds of the distance towards our final fiscal goals. We must be careful. If we backtrack, we will have problems. Greece was at the edge of the cliff but we have turned the corner," he told Mega TV.
Athens is aiming for a primary budget surplus this year for the first time since 2002.
Provopoulos also said the economic slump led to a rise in banks' non-performing loans to 22.5 percent at the end of the third quarter from 16 percent in December 2011.
Greek banks are merging to cope with the country's debt crisis and deep recession, which have caused big losses from government debt writedowns and loan impairments.
He said that in the end, three bigger and stronger banks with better access to funding markets will be formed.
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