The Portuguese government wants to cut the compensation companies must pay to fire workers by a third, as part of its drive to boost the economy's competitiveness, Labour Minister Helena Andre said on Monday.

The Socialist government is trying to convince investors the country will not follow Greece and Ireland in requesting an international bailout and has started a painful austerity drive while it also seeks to improve Portugal's competitiveness, including via measures to make the labour market more flexible.

Andre said the government proposes to cut layoff compensations to 20 days' salary per year worked from the current 30 days, and limit compensation to a maximum of one year's salary.

We have to create conditions for workers and companies to compete in an increasingly competitive market. The competition is not only internal but also external, Andre told SIC Noticias channel after talks with business and labour leaders.

The minister said the changes would align Portugal's policy on this matter with that in Spain, its main trade partner.

Andre said the proposals would apply only to new contracts, and also include making companies finance a fund that will pay the compensations.

The proposals have yet to be agreed with business leaders, who want to cut the compensations to 15 days per year worked.

Portugal's main umbrella union CGTP has said it is against the proposals, but the second-largest union, the UGT, said it is available to negotiate the matter so long as the compensations are guaranteed by the new fund.

The government is targeting cutting the budget deficit to 4.6 percent of gross domestic product this year from 2010's estimated 7.3 percent through austerity measures that include public sector wage cuts and tax hikes.

(Reporting by Shrikesh Laxmidas; editing by Diane Craft)

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