Greece's budget gap last year was worse than feared, the European Union's statistics office revealed on Thursday, triggering a fresh slide of asset prices in Greece and other debt-choked European countries.

The news hurt financial markets' waning hopes for Greece to bring its swelling national debt under control, and increased pressure on Athens to seek billions of euros of emergency loans from the EU and the International Monetary Fund.

It looks like a terrible situation just got worse, said Nick Kounis, economist at Fortis.

The budget figures were announced as tens of thousands of Greek nurses, teachers and other public workers staged a one-day strike to protest against the government's austerity measures.

They demanded that Athens reject any pressure for further spending cuts in crisis talks that it launched this week with the EU and the IMF. [ID:nLDE63L06N]

The Greek government posted a budget deficit of 32.34 billion euros or 13.6 percent of gross domestic product in 2009, not the 12.7 percent which it had reported earlier, Eurostat said in a review of countries' deficits throughout the region.

It added that the Greek deficit might be revised again, by between 0.3 and 0.5 percentage points of GDP, because of uncertainty about the quality of Greece's data and accounting procedures.

In a brief statement, the Greek Finance Ministry insisted the new numbers would not change its intention to shrink the deficit by four percentage points this year. It said measures already taken would be enough to cut the deficit by six points.

BACKING AWAY

But both Athens and EU officials appeared to be backing away from a previously announced target for Greece to slash the deficit to 8.7 percent of GDP this year.

The target for 2010 is a four percentage point reduction of the deficit. We did not refer to the starting point or the arrival figure, only the reduction effort, European Commission spokesman Amadeu Altafaj said in Brussels. Greece is on track to meet the target for 2010; that is what counts.

Some revision to the 2009 budget gap had been expected, and several analysts said Athens might still succeed in cutting its deficit sharply this year.

But the financial markets were worried by the revision because inaccuracies in Greek data -- some of them apparently deliberate and politically motivated -- have fueled its debt crisis by angering investors and Greece's EU partners.

Last October, the incoming socialist government said Greece's 2009 budget deficit would be twice as big as a previous estimates -- and four times the EU ceiling.

What concerns me is the general uncertainty about the Greek official figures. This affects market perception about Greece ...that one can't rely on the Greek statistics and that the deficit is revised up and up and up, Giada Giani, economist at Citigroup, said on Thursday.

The Greek Finance Ministry attributed the latest revision to a deep recession, which reduced GDP more than expected, and a reassessment of the financial accounts of pension funds.

MARKETS

In response to the deficit news, Greece's two-year government bond yield soared to 9.81 percent, from 8.26 percent on Tuesday and just 1.38 percent before the crisis last November.

The 10-year bond yield also jumped but by a smaller amount to 8.79 percent, increasing the inversion of the Greek yield curve -- a classic sign that investors fear Greece may have trouble servicing its debt.

The cost of insuring five-year Greek government debt against a default shot up to the highest level in Europe, surpassing Ukraine. Greek credit default swaps hit 565 basis points, or 565,000 euros per 10 million of bonds, against 485 on Wednesday.

Investors fear other weak euro zone states could become the next dominos if Greece defaults; bond yields and CDS for Spain, Portugal and Ireland rose on Thursday. The euro fell back near 10-month lows against the dollar, as investors worried about the long-term cohesion of the euro zone.

Greece will need to refinance 8.5 billion euros of bonds maturing on May 19, and the markets think it will almost certainly have to apply for a 40-45 billion euro aid package from euro zone states and the IMF -- though the German public's opposition to helping Greece could delay the disbursal of funds.

Austrian Finance Minister Josef Proell said Athens was apparently unwilling to accept conditions that would be attached to the aid, and was therefore hesitating about applying for funds. But he added that the time for action is now.

The Greeks must put their cards on the table now and say how much exactly (they need) and when, Proell told Austrian broadcaster ORF.

(Additional reporting by Renee Maltezou, Harry Papachristou, Jan Strupczewski and Emilia Sithole; Editing by Andrew Torchia)

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