UPDATE 1-Hungary rules out austerity to IMF/EU, markets fall

* Bank tax needed, austerity not option-Economy Ministry

* Forint falls 2.7 pct, bonds ease after IMF/EU talks end

(Adds detail, markets)

BUDAPEST, July 19 (Reuters) - Hungary’s government insisted on a new financial sector tax this year and ruled out further austerity measures at talks with international lenders that were suspended at the weekend, the economy minister said on Monday.

The forint plunged about 2.7 percent in early trading on Monday to 289.70 versus the euro EURHUF=D2 after a review of Hungary's funding agreement signed in Oct. 2008 fell through on Saturday when lenders said the new centre-right government needed to take tougher measures to rein in the budget deficit. [ID:nLDE66G0AP]

Government bond yields jumped 20-25 basis points after the open in illiquid trade.

Talks with the International Monetary Fund (IMF) and the EU ended prematurely on Saturday without concluding the country’s programme review.

This means Hungary will not have access to remaining funds of about 5.5 billion euros ($7.1 billion) in its 20 billion euro financing deal until the review is completed.

Even though the country is not under immediate financing pressure, it has been using the IMF/EU loan as a safety net this year so the lack of agreement risks damaging investor confidence. [ID:nLDE66I08V]

Economy Minister Gyorgy Matolcsy told public television m1 on Monday that the IMF and EU have voiced concerns over a 200 billion forint tax planned by the government to contain the budget deficit and a bill which would cut the central bank governor’s salary.

“Hungary has experienced a programme of austerity over the past five years, we inherited this from the previous governments and we would like to do away with the unfortunate consequences of these steps,” Matolcsy said.

“We have told our partners that further austerity packages were out of the question.” The IMF said in a statement on Saturday that Hungary will need to take additional measures to meet its deficit targets this year and in 2011, set out in its current financing deal and in line with the country’s obligations with the European Union.

In a separate statement, the European Commission said the reducing Hungary’s deficit by next year “will require tough decisions, notably on spending.”

Hungary’s new government has pledged to meet this year’s budget deficit target of 3.8 percent of GDP, which Matolcsy reaffirmed on television on Monday, but he said this should be done primarily with the help of the planned tax on banks.

“We will impose the bank tax, we know this is a significant extra burden but we also know that with this we can achieve the 3.8 percent deficit,” he said.

“It is either bank tax or austerity, these are the two ways of thought.”

For highlights of Matolcsy’s comments click [ID:nLDE66I07T]