Greece will miss the deficit targets set in its EU/IMF bailout this year and next as it faces worse-than-expected recession, sources said ahead of the adoption by the cabinet of the 2012 draft budget on Sunday.

Greece sees its 2011 budget deficit reaching 8.5 percent of GDP this year, missing a 7.6 percent target, the documents set to be approved by the cabinet show, two sources said.

The budget draft foresees that the deficit will be brought down to 6.8 percent of GDP next year, above a 6.5 percent target in the bailout that saved Greece from bankruptcy, the sources said.

In the same documents, Greece sees its economy contracting by 5.5 percent this year and about 2 percent next year. This is in line with the IMF's World Economic Outlook, published last month, but much worse than the projections used for the July bailout negotiations, which predicted the country's economy would return to growth in 2012.

Athens blames its failure to meet EU/IMF deficit targets on the worse-than-forecast contraction of the economy, while its lenders say failure to push through much-needed structural reforms is also largely to blame.

A deeper-than-expected recession makes it harder for Greece to collect revenues and meet its deficit targets. It also makes the impact of austerity measures such as tax hikes and wage cuts weigh harder on people.

The Greek cabinet is also expected to approve on Sunday a contentious plan to begin laying off state workers, in a race to slash spending, free up bailout loans and stave off bankruptcy.

Without the release of an 8 billion euro ($10.7 billion) tranche of an EU bailout, massively indebted Greece could run out of money to pay state wage bills within weeks.

(Reporting by Ingrid Melander and Dina Kyriakidou)

International Monetary Fund