UPDATE 1-Ontario to run record budget deficit in 2009-10

* Ontario says economy to shrink 3.5 percent in 2009

* Says faces significant economic challenges

* Expects return to economic growth in 2010 (Adds details)

By Frank Pingue

TORONTO, Oct 22 (Reuters) - Ontario's government said on Thursday it will run a record budget deficit of C$24.7 billion ($23.5 billion) this fiscal year as it battles to pull the Canadian province's export-oriented economy out of recession.

The deficit projection is 76 percent above the forecast for the 2009-10 fiscal year that the government made in its March budget. This is also the second time the government has bumped up the figure. Ontario is Canada's most populous province and the hardest hit by the global economic slowdown.

"Almost all other Canadian provinces are forecasting larger deficits this year," Ontario Finance Minister Dwight Duncan said in the government's autumn economic update. "The economic downturn has had a very negative impact on all of us."

While the province acknowledged that there have been recent signs of economic recovery, it cautioned that the impact of the global economic recession is still considerable.

The province, which relies heavily on exports of autos and auto parts to the United States, forecast its economy would shrink 3.5 percent in 2009. In March it forecast a 2.5 percent contraction.

It expects the economy will return to growth in 2010 with real gross domestic product rising to 2.0 percent, and then to 3.0 percent in 2011. Those forecasts are down slightly from figures provided in the March budget.

Ontario said its net debt, the difference between its total liabilities and financial assets, would rise to C$184.1 billion in 2009-10. The province also said its debt financing program will now total C$42.6 billion in 2009-10.

To help Ontario, the manufacturing heartland of Canada, emerge from recession, the province announced more spending on infrastructure, the auto sector and skills training.

In March, Ontario said it would run a deficit of C$14.1 billion for the 2009-10 fiscal year. It revised the figure to C$18.5 billion in June due to the costs of bailing out General Motors and Chrysler operations in Ontario.

Last month, the province said it did not expect it would have to raise its deficit projection for the current fiscal year because there had been improvements in the global economy.

Ontario government debt <CA/PROV> <0#CAONTBMK=> were steady to slightly weaker following the release of the update. The yield on the province's two-year benchmark bond rose to 1.674 percent from 1.659 percent before the update was announced.

Shorter-term Ontario bonds underperformed, with the two-year yield 18.1 basis points above the Canadian government bond, up from 16.4 basis points before the news.

($1=$1.05 Canadian) (Editing by Peter Galloway)