* Austrian debt to peak at 79.2 pct of GDP this year
* Maastricht deficit seen at 2.7 pct
* Austrian banking sector made 2013 loss of 1.04 bln euro (Adds details on Hypo, other banks)
By Georgina Prodhan and Alexandra Schwarz-Goerlich
VIENNA, April 29 The cost of winding down nationalised Austrian bank Hypo Alpe Adria will push public debt to a record 79.2 percent of gross domestic product this year, the finance minister said.
Michael Spindelegger said the government would absorb the entire 17.8 billion euros ($24.6 billion) of toxic assets planned to be transferred from Hypo into a "bad bank" this year, boosting state debt to 257 billion euros.
"In our land of mountains there is now one mountain too many. This is the debt mountain. It is the mountain that keeps growing and growing. It cannot go on like this," he said on Tuesday, presenting his first budget.
Austria aims this year to end the damage that Hypo has done to public finances since its nationalisation in 2009 after a decade of breakneck expansion in the Balkans. It has pumped more than 5 billion euros into the bank so far.
Spindelegger said the estimated cost of 4 billion euros for establishing the bad bank, which includes capital injections and possible writedowns, would raise the 2014 budget deficit to 2.7 percent of GDP from 1.5 percent last year.
But the figure, close to the EU average, would remain below the EU threshold of 3 percent and fall back to 1.4 percent in 2015, he said.
Austria's final decision to establish a bad bank for Hypo, after years of hoping it could shrink itself back to health, is a sign of a new realism about the prospects of Austrian banks in central and eastern Europe (CEE).
After years of expansion in the region that were a key driver of growth for the sector and the Austrian economy, lenders are regrouping, with the additional motivation of looming balance-sheet tests by the European Central Bank.
UniCredit's Bank Austria, the biggest lender in the region, wrote down to zero 2 billion euros worth of assets in 2013, many of them acquired at high prices in CEE, pushing it to a loss of 1.6 billion euros.
Its closest rivals in the region, Austria's Raiffeisen Bank International and Erste Bank, have also changed course from expansion to consolidation and selective retreat.
Hypo expects to get no more than 500 million euros from the sale of its once-mighty Balkans banking network.
Escalating tensions between Ukraine and Russia that are polarising East-West relations have cast a new shadow over a region already struggling with anaemic growth as its richer western European neighbours grappled with their own crisis.
Austria's central bank said on Tuesday the Austrian banking sector as a whole made a loss of 1.04 billion euros last year, its first negative result since the national bank began compiling consolidated figures 15 years ago.
Combined earnings from the foreign units of Austrian banks, which are mainly in CEE, have fallen each year to 6.3 billion euros in 2013 from a peak of 7.9 billion in 2009, the central bank's figures showed.
The bank said, however, that Austrian lenders were now better positioned for the future, with a core capital ratio of 11.9 percent in the sector, up from 7.7 percent in 2008.
Spindelegger said Austria's debt and deficit ratios would progressively fall after this year, and reiterated the Alpine nation would reach a balanced budget excluding one-offs by 2016.
Austria, one of the richest nations in the struggling euro zone with the bloc's lowest unemployment rate, is forcing efficiency savings on institutions including the police and schools but aims to avoid a fully fledged austerity package.
Spindelegger is also leader of the conservative People's Party, the junior partner in a governing coalition with the Social Democrats. ($1 = 0.7223 Euros) (Editing by John Stonestreet and Alison Williams)