UPDATE 4-Latvia to cut pensions, salaries to avert crisis

* Latvian government says agreed ways to cut budget

* Pensions, state salaries, parent allowances to fall

* No tax rises

* Moody's sees devaluation avoided, pressure to continue (Recasts with government decision, adds quotes)

By Jorgen Johansson and Patrick Lannin

RIGA, June 11 (Reuters) - Latvia's government is to reduce old age pensions and state sector salaries but not raise taxes, it said on Thursday as it tries to win more loans and avert crisis and possible currency devaluation.

The five-party coalition government agreed with social partners such as unions and employers on ways to find savings of 500 million lats ($1.01 billion) to win further loans from the International Monetary Fund and European Union, which are seen as the only way to survive a deep economic slump.

"It was a difficult decision and it will not be popular but it had to be done," Prime Minister Valdis Dombrovskis told reporters after a marathon and sometimes chaotic government session of almost 12 hours.

"Our decision is sending a signal to the EU that we are serious," he added.

Against expectations, the government decided against introducing a progressive income tax for the first time to replace the current flat tax of 23 percent.

The moves will include a cut in old age pensions of 10 percent, a whopping 70 percent cut in the pensions of those who still work, and a 20 percent cut in state sector salaries.

The tax-free minimum on income will also be cut and allowances for parents reduced by 10 percent.

The steps, which Dombrovskis has said he expects parliament to back on June 17, are aimed at winning a further 1.2 billion euros of funds from a 7.5 billion euro IMF and EU rescue package.

The economic crisis has led to speculation Latvia will have to devalue and end the peg of its lat currency to the euro.

Ratings agency Moody's expected a devaluation to be avoided given Latvian and EU commitments, but said risks remained.

"Moody's also stresses that the possibility of a devaluation cannot be ignored, as the economic and social pressure in Latvia will continue to be elevated for some time," it said. [ID:nLB777098]