UPDATE 2-Latvia second EU member to seek IMF aid in crisis

(Adds Estonia, Lithuania, analysts, background)

By Jorgen Johansson and Patrick Lannin

RIGA, Nov 20 (Reuters) - Latvia sought economic rescue from the International Monetary Fund and European Union on Thursday, becoming the second EU state to seek a lifeline after sliding into recession and having to take over its second-largest bank.

It followed weeks of speculation from analysts that Latvia and its Baltic neighbours, heavily exposed to foreign borrowing, could seek IMF help to stave off economic ruin, following Hungary and Ukraine in October and Serbia this month.

The country's capitulation gives credibility to fears that others in the EU's former communist eastern wing will be forced to reach out for aid as a global downturn takes hold.

"We have decided to start official talks with the European Commission and the IMF about funding to stabilise the economy," Prime Minister Ivars Godmanis told reporters.

Latvia says its stability is helped by having a banking sector dominated by Nordic banks Swedbank (SWEDa.ST), SEB (SEBa.ST) and Nordea (NDA.ST).

But what was Europe's fastest growing economy shrank 4 percent in the third quarter and state finances have worsened as the credit crunch hit home at a time when economists when the Baltic economies were already heading for a hard landing.

The crunch has put a clamp on the funds that Latvia needs to counterbalance its large current account gap, and the government this week denied rumours it was planning to devalue the lat currency from its target band against the euro to help.

Finance Minister Atis Slakteris said in a statement that the sums needed from the IMF and EU would become clear during the course of talks.

He said the country needed to ease the impact of the global financial crisis on Latvia, to boost the economy and to ensure the stability of its financial system.

"It is planned that the first results of the talks could be known in the next week," Slakteris said.

Neighbours Lithuania and Estonia said that they saw no need for funds.

"We are coping on our own ...," Lithuanian Finance Minister Rimantas Sadzius told Reuters.

The lat was unaffected by the news, said one trader. It was quoted at 0.7087/99 euros, still at the 0.7098 euros weak end of its 1 percent band. The central bank has spent more than 600 million euros in the last seven weeks to support the currency.