* Economy Minister rejects calls to raise deficit targets
* OECD says Italy needs more fiscal tightening
* Forecasts underline challenge for new Letta government
By Gavin Jones and Giuseppe Fonte
ROME, May 2 (Reuters) - Italy's economy minister on Thursday ruled out trying to renegotiate the country's budget targets, even as the OECD called for more budget austerity.
Fabrizio Saccomanni told parliament a move to ease Italy's deficit targets - such as may happen with France and Spain - would be counter-productive.
"References to possible re-negotiations should not be taken into consideration," he said. "It could lead the European Commission to say it is suspending our exit from the excessive deficit procedure."
It was a reference to the mechanism by which the Commission imposes corrective action on high-deficit countries within the European Union. France and Spain are expected to get some more time to reach their deficit targets.
Saccomanni's comments underline a quandary facing new Prime Minister Enrico Letta, who has pledged to cut taxes as part of a drive to revive a moribund economy but has still not indicated how he will pay for it.
Several senior members of the ruling coalition, including centre-right leader Silvio Berlusconi, have told Letta he should raise Italy's deficit targets.
Saccomanni, a former deputy central bank chief, was speaking after the Organisation for Economic Co-operation and Development said Italy should take corrective steps because its fiscal deficit and public debt are both already going up.
"If Italy wants to go to the negotiations and exit the excessive deficit procedure they will need to present new measures," OECD Secretary General Angel Gurria told reporters in Rome at an event to present the OECD's latest report on Italy. ()
At a news conference with Gurria, Letta ignored questions on whether Italy would adopt corrective measures, preferring to focus on the need to create jobs for young people in a country with youth unemployment above 38 percent.
The plight of the euro zone's third largest economy, meanwhile, was underlined by a survey showing that the manufacturing sector contracted in April for a 21st consecutive month.
Large parts of Letta's own centre-left Democratic Party as well as Berlusconi's People of Freedom would find any new budget tightening measures unacceptable as Italy grapples with its longest recession for 20 years.
The OECD forecast the budget deficit would rise to 3.3 percent of output this year, above the EU's 3 percent limit and Rome's 2.9 percent target. The deficit would reach 3.8 percent in 2014, more than twice the 1.8 percent target, it projected.
Saccomanni said that if Italy maintained its fiscal discipline he was confident it would exit the excessive deficit procedure by June at the latest.
The OECD forecast the economy will shrink by 1.5 percent in 2013, compared with a forecast of a 1.0 percent fall in output made in November. It projected anaemic growth of 0.5 percent in 2014.
"Fiscal consolidation, declining investment and the rebuilding of household savings, along with tight credit conditions, are likely to hold back growth in coming months," the report said.