* Sees GDP up 0.2 pct this year, government sees 0.8 pct
* Deficit to be 2.9 pct GDP vs 2.6 pct government target
* Renzi seeking budget leeway at EU summit to help growth (Adds background and details)
By Francesca Piscioneri
ROME, June 26 (Reuters) - Italy's employers' association Confindustria on Thursday slashed its growth forecast for this year and urged Prime Minister Matteo Renzi to act quickly to turn around the euro zone's third-biggest economy.
Confindustria said the economy would expand 0.2 percent, a half percentage point lower than its 0.7 percent December forecast and far below the government's 0.8 percent target.
"The health of Italy's economy remains fragile," Luca Paolazzi, the group's chief economist, told reporters. "The slow-growth sickness has not been cured and the patient is still weak."
While Renzi's government, which took over in February, has given an "energetic impulse" to economic reforms, it must act quickly to boost investments, reduce taxes, overhaul wage dynamics, and free up credit for businesses, he said.
At a summit of European leaders today and tomorrow, Renzi is pushing for an interpretation of European Union budget rules that would give more leeway to countries making reforms. He has tied his support for former Luxembourg Prime Minister Jean-Claude Juncker to become the new European Commission chief to an agreement over the issue.
Renzi has the daunting task of trying to turn around Italy's economy, which has not grown for more than a decade. Youth unemployment has reached more than 40 percent and the country's debt hovers above 2 trillion euros ($2.7 trillion).
On Tuesday, Renzi, buoyed by a landslide victory in the European Parliament vote last month, said Europe's "high priests" of austerity risked condemning the region to permanent stagnation.
Italy takes over the EU's rotating, six-month presidency next week.
Though growth will be minimal this year, Confindustria said the economy grew 0.3 percent in the second quarter after shrinking 0.1 percent in the first. Growth is seen at 1 percent next year, it said.
The government forecasts gross domestic product will rise 0.8 percent in 2014 and 1.3 percent in 2015.
The budget deficit will remain just below the European Union ceiling of 3 percent of output, coming in at 2.9 percent, higher than the government's 2.6 percent goal, Confindustria said, and fall to 2.5 percent of GDP next year.
Debt in 2014 will come in at 135.9 percent of GDP compared with a government target of 134.9 percent, it said, and will fall to 135.1 percent in 2015. The government's goal is to shrink debt to 133.3 percent of GDP next year. ($1 = 0.7335 Euros) (Writing by Steve Scherer; Editing by Ruth Pitchford)