Cash-strapped Serbia sought to repair its damaged relationship with the IMF by pledging to cut its budget deficit, after rows over broken spending limits and central bank independence.

Serbia's Socialist-led government, which took power in July, adopted on Monday a 2012 budget deficit revision targeting a deficit of 6.7 percent of GDP, down from the 7.1 percent it is currently running.

The move is also aimed at reassuring financial markets rattled by the expansion of Serbia's deficit at a time when the economy is contracting on the back of falling demand from the euro zone, Serbia's key trade partner and source of investment.

The deficit must come down if Serbia is to stabilise its dinar currency, reassure investors and secure new funding from the IMF, which froze a 1 billion euro (800 million pounds) standby loan in February over broken spending promises.

An IMF mission arrived in Belgrade on Monday to inspect the country's finances and discuss concerns over the independence of monetary policy under legislation adopted in August stepping up government control over the central bank.

The Fund says it will not discuss a new loan arrangement yet, but Serb officials say they hope to convince the lender to offer its support by the end of the year, with the economy forecast to contract 0.5-1.0 percent.

"We would like either budget backing from the IMF or, if that fails, a precautionary deal," Finance Minister Mladjan Dinkic told a news conference.

Dinkic said the government planned to issue a $750 million Eurobond next month to tap its maiden $1 billion Eurobond last year, and that it would also seek "direct borrowing" from Russia or other sovereign creditors.

NO FREEZE ON WAGES, PENSIONS

The revised budget, which should go before parliament next week, raises non-food value-added tax from 18 percent to 20 percent, the government said in a statement. Tax on profits will go up from 10 percent to 12 percent in 2013.

It said public sector wages and pensions, by far the state's biggest outgoing, would rise by 2 percent in October and again in April 2013. "The increase must reflect the realistic possibilities of the budget," it said.

Around 130 levies and taxes will be abolished, the government added.

The measures, it said, would halt the "dizzying" increase in public debt, which, at almost 55 percent of gross domestic product, is far higher than recommended by the International Monetary Fund for similar emerging economies.

"This programme should bring savings of 26 billion dinars in the last quarter of this year and 120 billion dinars (around 1 billion euros) next year," it said.

"When there's a big deficit, public debt that is not easy to finance, when Serbia has the lowest pay in the region and highest interest rates, when the exchange rate is unstable and production is falling, further decline must be stopped," said Socialist Prime Minister Ivica Dacic.

Dacic said the central bank row would not be the "primary issue" in talks with the IMF.

But analysts said the government would face pressure to amend the law and loosen its grip on the monetary policy.

"The absence of an IMF deal would close to Serbia all doors of credible creditors," said Misa Brkic, economic analyst at the Serbian weekly Novi Magazin.

"The package of (IMF) talks, whether with this mission or a later, real negotiating mission, will include talks about restoring the independence of the central bank."

(Writing by Matt Robinson; Editing by Ruth Pitchford, Ron Askew)