Greece's budget gap last year was worse than feared, the European Union's statistics office revealed on Thursday, as Moody's Investors Service downgraded its rating of Greek government debt.

The news triggered a fresh slide of asset prices in Greece and other debt-choked European countries, and increased pressure on Athens to seek billions of euros of emergency loans from the EU and the International Monetary Fund.

Greece will need to refinance 8.5 billion euros of bonds maturing on May 19, and as soaring yields make it ruinously costly for Athens to issue bonds, investors think it may need a bailout to avoid defaulting or restructuring its debt.

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.

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 FROM TARGET

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 hit hard 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.

Moody's cut Greece's sovereign rating by one notch to A3, placing it four notches above junk status, and kept the new rating on review for a possible further downgrade.

There is a significant risk that debt may only stabilize at a higher and more costly level than previously estimated, it said.

MARKETS

Greece's two-year government bond yield soared to 11.62 percent on Thursday, from 8.26 percent on Wednesday and just 1.38 percent before the crisis erupted last November.

The 10-year bond yield also jumped but by a smaller amount to 9.14 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 through credit default swaps shot up to the highest level in Europe, surpassing Ukraine.

Investors fear other weak euro zone states could become the next dominos if Greece defaults; bond yields and CDS for Spain, Portugal and Ireland also rose on Thursday.

The euro sank almost 1 percent to near one-year lows against the dollar, as investors worried that the Greek crisis had exposed severe economic strains within the euro zone and member states' difficulties in coordinating policies.

The markets think Greece 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 by Berlin.

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.

Greece may get a short-term bridge loan from European countries before the EU/IMF aid package is activated, a senior Greek government source told reporters, though he insisted his comment was theoretical and there was no need for such action.

A Reuters poll of about 50 economists found that because of the aid package, they saw only a 5 percent chance of a Greek default in the next three months. But they estimated a 23 percent chance in the next five years.

Capital Economics said that even if Greece soon obtained 45 billion euros in emergency loans, it might need tens of billions of euros in additional aid over the next year, and instead of calming, markets might simply switch to focusing on the bleak medium-term outlook for Greek finances.

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

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