* EU will release second loan tranche for Latvia in July
* Sets 2012 deadline for deficit under 3 percent/GDP
* Urges effort to bring deficit under 10 percent this year
* Latvia welcomes loan decision, sees more tough steps ahead
(Adds Latvian comments)
By Mark John
BRUSSELS, July 2 (Reuters) - The European Commission pledged on Thursday to release a further loan this month to help Latvia survive a deep economic crisis and keep its currency peg, but urged it to bring down its budget deficit to EU levels by 2012.
Latvian Prime Minister Valdis Dombrovskis said the loan decision showed his nation, which has approved budget cuts, including pension and wage reductions, was on the right track, though he said the hard work had only just begun.
"Latvia is going through a very painful adjustment, but the EU is providing considerable support," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement.
Earlier the Commission decided to release 1.2 billion euros for Latvia, the second instalment of a 3.1 billion euro loan which the EU approved in January. It is part of a wider 7.5 billion euro package that includes support from the International Monetary Fund.
Delays in getting the money as well as pressure on the Latvian currency caused fears last month that the country would have to devalue, but the EU decision has brought relief to markets.
Swedish banks, particularly Swedbank and SEB, are also vulnerable to events in Latvia and the other Baltic states after a rapid expansion in the region, which is turning sour as loan losses have risen during the crisis.
As it approved the loan, the Commission also kept up the pressure on Latvia to gets its fiscal house in order, recommending that the country get its budget deficit down to 3 percent of gross domestic product (GDP) by 2012.
EURO GOAL
"The (2012) deadline is consistent with Latvia's ongoing process of economic and budgetary adjustment and its medium-term euro adoption aim," the Commission noted of Latvia's aim of joining the common currency zone.
Prime Minister Dombrovskis has said his nation aims to adopt the euro by 2013 at the earliest.
The government and central bank want to keep the peg of the lat currency to the euro until euro adoption, despite intense speculation an economic slump close to 20 percent this year and government funding problems will force it to devalue.
Dombrovskis said in a statement that the Commission's loan decision showed Latvia's budget cuts and structural reforms were "correct and necessary measures which are aimed at the economic stabilisation of Latvia as soon as possible".
"At the same time, we have to admit this is just one of the steps that we have taken to achieve the goal of a budget deficit of 3 percent of GDP in 2011-2102," he added. "Work on the 2010 budget and in future years will require a series of serious decisions...," he added.
Latvia has announced it would cut state salaries by up to 20 percent as part of efforts to narrow a deficit expected to surpass 11 percent of gross domestic product (GDP) this year.
The Commission called on Latvia to implement extra budget measures agreed by parliament on June 16 "to reach a general government deficit this year of below 10 percent of GDP".
It urged Latvia, once it has brought the deficit under 3 percent, to pursue a structural improvement in the budget of at least 0.5 percent per year towards a goal of a deficit of just 1 percent of national output. (Reporting by Mark John in Brussels and Patrick Lannin in Riga; Editing by Dale Hudson/David Stamp)