UPDATE 1-IMF sees rising Italy debt, urges rapid action

(Combines previous stories, adds background)

WASHINGTON, May 8 (Reuters) - The International Monetary Fund warned on Thursday that Italy's public finances are deteriorating and urged Silvio Berlusconi's new conservative government to take rapid corrective action.

"The budget deficit (position) is likely to weaken substantially in 2008 and debt is rising again," said IMF spokesman Masood Ahmed at a news briefing. "We do think rapid action is needed to prevent further slippage."

Berlusconi's government was sworn in on Thursday after winning April's election with a tax-cutting agenda.

"Any (tax) cuts need to be at least fully compensated by expenditure reduction, given the pressing need for fiscal consolidation," Masood Ahmed said.

He added that tax cuts should aim to stimulate the supply side of the economy, and said Italy must also continue recent progress in reducing tax evasion.

He called on the government to adopt "a raft of liberalising structural reforms," including introducing more competition for local government services.

These and other recommendations would be the basis for discussions with the Italian authorities in the coming months, Masood Ahmed said.

Romano Prodi's outgoing centre-left government projected the budget deficit to rise to 2.4 percent of gross domestic product this year, up from 1.9 percent in 2007.

In its World Economic Outlook published last month the IMF forecast the deficit at 2.5 percent but said the public debt would fall slightly to 103.6 percent of GDP from 104 percent, before edging back up again to 104 percent in 2009.

Berlusconi takes power at a time of flagging economic activity, with Italian GDP growth forecast by the IMF at just 0.3 percent this year.