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UPDATE 2-Latvia backs tough 2010 budget amid protests

* Latvian parliament backs vital 2010 budget

* Budget needed to keep winning rescue funds from EU/IMF

* Thousands of students protest education cuts (Adds budget approved, prime minister quote)

RIGA, Dec 1 (Reuters) - Latvia’s parliament backed a 2010 crisis budget of tax rises and spending cuts on Tuesday to win more international bailout funds, despite protests by students and trade unionists against the austerity measures.

Hit by one of the deepest recessions in the European Union, Latvia must cut its budget deficit to keep receiving funds from a 7.5 billion euro ($11 billion) rescue package led by the International Monetary Fund and the EU.

It also wants to avoid devaluing its lat currency, pegged to the euro. EURLVL=

The 2010 budget, which includes a rise in the income tax rate, higher taxes on cars and motorbikes and a new capital gains tax, is one of the toughest since the Baltic state regained independence from the Soviet Union in 1991.

But lawmakers gave it their backing with 64 votes in favour and 30 against in the 100-seat parliament.

Prime Minister Valdis Dombrovskis, who leads a sometimes fractious five-party coalition, hailed the vote.

“The 2010 budget will be fundamental to stabilising the economic situation in Latvia,” he told reporters.

Before the vote, about 5,000 students and hundreds of union activists picketed parliament in separate protests.

The peaceful but noisy student rally against cuts in education spending was one of the largest recent demonstrations.

“A hundred clever cabbage heads, a hundred clever cabbage heads,” the protesters shouted, referring to the 100 members of parliament.

“Educate parliament, educate parliament,” they also chanted. About 200-300 union activists earlier whistled and jeered members of parliament as they headed into the building.

“We want our financing to be maintained. My high school will run out of funds in March,” said Alma Kaurate, 20.

Latvia is among the countries hardest hit by the global financial crisis after a consumer and housing boom fuelled by foreign currency borrowing, notably from Swedish banks, burst in 2008.

The government has slashed wages for teachers, policemen, nurses and other public sector workers this year and plans more spending cuts next year as well as the tax rises.

The coalition, which had earlier squabbled about the tax rises before caving in to international pressure to live up to its promises to lenders, has to keep its 2010 public sector budget deficit at 8.5 percent of gross domestic product (GDP) under EU measurements.

A mission from the European Commission and IMF began work in Riga on Tuesday and is expected to take about two weeks to give its view on the budget. Both institutions have already said they back the measures planned in it.

The cuts have created social tensions, but there has been no repeat of a January riot against the former government. The current coalition faces a general election next year. (Additional reporting by Jorgen Johansson; Editing by Mark Trevelyan) ((Riga newsroom, patrick.lannin@reuters.com, patrick.lannin.reuters.com@reuters.net, +371 29 269 191)) ($1=.6650 Euro)

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