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* Ups 2014 EU growth forecast to 1.6 pct, euro zone to 1.2 pct
* Business group says expects growth to accelerate in 2015
* Says geopolitical tension is main risk
* Russian downturn, Finland already in recession
BRUSSELS, May 21 (Reuters) - European businesses regard the Ukraine crisis and the prospect of broadening sanctions against Russia as the greatest threats to the region's economic recovery, BUSINESSEUROPE said on Wednesday.
BUSINESSEUROPE, which represents business federations in 35 countries, said in its spring outlook that Europe's economy should gain strength this year and next as domestic demand replaced exports as the engine of growth.
However, the recovery remained fragile with more downside than upside risks, chief among the former being an escalation of tensions in Ukraine.
The federation asked members whether factors such as the exchange rate or carbon emission prices were more positive or negative risks for their outlooks and rated them according to the gap between positive and negative responses. The most negative reading was clearly for the geopolitical situation.
That balance stood at zero in November, when members were most concerned about the threat of tax hikes.
The Russian economy is likely in recession, its economy minister said last week, while the International Monetary Fund has warned that Ukraine-related sanctions are scaring off investors and depressing growth.
The West has to date imposed sanctions focused on individuals and a handful of companies, but has threatened a third phase of sanctions that would target sectors.
BUSINESSEUROPE said it was not in favour of broader economic sanctions.
"We already have a clear downturn in Russia and we start to see the effects," General Secretary Markus Beyrer told a news briefing. "This is a concern as there is a negative impact on growth in a recovery."
Finland, about 10 percent of whose exports go to Russia, has already slipped into recession.
Some 7.3 percent of EU exports head to Russia, while the EU is the market for 45 percent of Russian exports.
Despite the negative risks, BUSINESSEUROPE raised its forecasts for growth to 1.6 percent for the European Union and to 1.2 percent for the euro zone, from 1.4 and 1.1 percent respectively.
It sees EU growth accelerating to 1.9 percent in 2015 and in the euro area to 1.6 percent.
BUSINESSEUROPE's report, published on the eve of European Parliament elections, said such rosier prospects should not lead EU member states to ease up on reform programmes, particularly those designed to boost competitiveness.
The federation's members found that only 23 percent of the European Commission's 150 country-specific recommendations had been satisfactorily implemented.
EU investment as a share of GDP was still far below pre-crisis levels and also significantly behind equivalent figures in the United States and Japan.
Access to finance was the key to raising investment, the federation said, with large companies able to access bond markets but smaller enterprises still relying on banks that were reluctant to lend.
BUSINESSEUROPE called for a full implementation of the EU's banking union to help narrow the divergence of lending rates across the region. It also said the European Central Bank's health check of banks needed to be thorough and robust to help restore confidence in financial institutions. (Reporting by Philip Blenkinsop; Editing by Hugh Lawson)