LONDON - Relief agencies have been hit by the global recession and falling donations, forcing them to cut jobs and to scale back or slow aid projects, and experts warn they may have to take more extreme measures.

The combination of a shortfall in donations, exchange rate pressures, erratic inflation levels overseas and reduced income from interest on reserves has put the squeeze on the aid sector.

Even as markets rebound and the world economy shows signs of recovery, relief groups are braced for tougher times.

Unemployment could rise further and economic growth will bring higher interest rates, cutting donors' disposable income.

The decline in donations lags behind the worst of the recession, said John Low of the Charities Aid Foundation (CAF), a UK charity that helps other charities manage money.

History suggests there might be more pain to come.

Charitable giving in Britain fell 11 percent in 2008-9 in inflation-adjusted terms, according to UK Giving, a report by CAF and the National Council for Voluntary Organisations.

In the United States, donations fell by 5.7 percent in real terms, according to Giving USA's 2008 report - the largest drop since the group began tracking U.S. donations fifty years ago.

InterAction, a U.S. coalition of more than 150 humanitarian groups, says funding could fall further, particularly by foundations, whose assets have been hit hard.

We know some foundations have either frozen what they're doing or are cutting back, said Barbara Wallace, InterAction's vice president for membership and standards. I don't know if we've seen the worst either.

Some areas of giving, certain charities and some regions of the world more immune to the crisis have bucked the trend.

Low said giving through payroll in Britain is rising, for example. Agencies with child-sponsorship models, such as Plan International, are faring better as are some faith-based groups.

Donations have fallen but those who monitor the sector say giving has not collapsed. Many existing supporters are staying loyal to their causes - the problem is recruiting new donors.

It is the combination of less giving with other aspects of the economic crisis that is causing charities so much pain.

TIME TO MERGE?

UK groups have been hit by a weak pound. Their overseas work is largely priced in dollars so their money buys less.

In addition, British charity Cafod said it had lost 1 million pounds off its reserves because of lower interest rates.

Some programs have had to be scaled back, said Tom O'Connor, Cafod's director of communities and supporters. If things got worse, if the economy got worse and our income dropped, we'd have to pull out of particular countries.

Cafod is facing a 10 percent budget shortfall next year and is making about 12 posts redundant in the UK and abroad. Oxfam and World Vision have also cut staff.

At Christian Aid, there may be up to 90 redundancies as the charity faces a 7 million pound deficit for 2010-11.

Afghan Aid, a UK-registered charity that works solely in Afghanistan, has had to lay off almost 150 staff over the last 18 months, close to a third of its work force.

Come March next year, I know we'll have to make more painful decisions on staff layoffs, said managing director Farhana Faruqi Stocker.

The crisis is forcing charities to manage money more effectively, target new donors and think more strategically.

We've had to revise our project fundraising strategy to focus more on local sources, said Ridwan Gustiana, founder and director of Indonesian aid group, IBU Foundation.

For many, the last option is to merge. Earlier this year, Interact Worldwide, a small British sexual health charity, merged with Plan after struggling to raise funding to match European Union grants it had received.

Britain's Charity Commission is urging members to consider merging while InterAction is helping members find ways to pool staff and resources and to identify the right time to merge.

(additional reporting by Thin Lei Win in Bangkok and Anastasia Moloney in Bogota; Editing by Matthew Jones)

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