Floods have ravaged Pakistan's economy, the prime minister said on Wednesday, with massive job losses and soaring inflation expected to hurt a nation whose stability is vital to the U.S. war against militancy.

Briefing the cabinet on the worst floods to hit impoverished Pakistan, Prime Minister Yusuf Raza Gilani expressed concerns over food security due to the prolonged damage to agriculture and said the social impact of the disaster was serious.

The floods have inflicted damage to the economy which may, by some estimates, reach $43 billion (£27.9 billion), while affecting 30 percent of all agricultural land, he said. Agriculture is the mainstay of the economy, with cotton the main cash crop, and the sector is one of the biggest sources of employment.

Facing the prospect of long-term economic pain inflicted by the floods, Pakistan hopes the International Monterey Fund (IMF) will soften the terms of an $11 billion loan. Pakistani and IMF officials are meeting in Washington to work out the impact to the already fragile economy from the floods.

This economic loss will translate into massive job losses affecting incomes of thousands of families, which may have serious social implications, said Gilani, whose government was heavily criticised for its slow response to the catastrophe.

The overall performance of agriculture consequently will be much lower this year and the next year. This loss will have a snowball affect on manufacturing, services and export sector. Most families face a real risk of income and employment losses.

The next wheat harvest is at risk after the floods destroyed more than 500,000 tonnes of seed stocks in Asia's third-largest wheat producer, the U.N.'s food agency said.

GRIM OUTLOOK

Pakistan's budget deficit is expected to climb to 6-7 percent of gross domestic product in the fiscal year 2010/2011, compared to an earlier forecast of 4.5 percent, said Gilani.

Pakistan is also likely to miss its annual inflation target of 9.5 percent for the same fiscal year, with inflation likely to range between 15 to 20 percent, he said.

Standard Chartered Bank also has a grim outlook for Pakistan's economy, lowering its growth forecast to 2.5 percent from 4.5 percent in the fiscal year ending June 2011.

Many Pakistanis, who lost homes, families and livelihoods, are furious at the government for not doing enough to help them.

The powerful military has taken charge of relief efforts, but Islamist charities, some linked to militant groups, have also stepped in, raising concerns they may exploit public anger.

Deputy Prime Minister Nick Clegg said it could take Pakistan years to recover, with threats from water-borne disease and opportunistic militants. The danger always is that you get groups who have an ulterior motive who provide aid to try to curry favour, he said after visiting an aid camp in the south.

The U.N. is concerned that water-borne diseases will affect millions, with nearly 540,000 cases of acute diarrhoea reported.

It's warm and there are more terrible conditions for infection to spread. These conditions will continue for at least three to four months, said doctor Nadeem January

Pakistan, a key U.S. regional ally, had made gains against Taliban insurgents before the floods.

Government air raids have killed up to 45 militants, their family members and other civilians with no ties to the fighters, including women and children, officials said on Wednesday. Such strikes have undermined public support for the army.

Washington, which wants a stable Pakistan because it is a frontline state in the U.S. war on militancy in Afghanistan, has provided more flood aid than other country.

Mistrust exists between Pakistan and the United States even though they have been allies for decades.

Pakistan's army said on Wednesday it scrapped talks with U.S. military officials after a military delegation sent to Washington had to go through unwarranted airport security checks.

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