* Monetary easing pace slows down, rates to bottom out soon
* Central bank sounds warning bell on domestic risks, Greece
* Cuts deposit, Lombard rates by 25 bps
* Leu falls in line with regional currencies
(Adds central bank statement)
By Radu Marinas
BUCHAREST, May 4 (Reuters) - Romania's central bank cut its key rate as expected to a new record low of 6.25 percent on Tuesday to boost its recession-hit economy and warned of risks from domestic fiscal policy and a spillover from Greece.
The bank lowered rates by a quarter of a percent, its smallest cut since it began a 400 basis points reduction in 2009 as it seeks to give the struggling economy, reliant on an International Monetary Fund lifeline, a shot in the arm.
"As expected, the central bank has chosen a somewhat prudent stance ... probably mainly because of the debt crisis in Western Europe," said Nicolaie Alexandru-Chidesciuc, chief economist at ING Bank in Bucharest.
All Romania's previous rate cuts over the past 12 months were of a half-a-percent size and analysts said borrowing costs were unlikely to fall much lower given inflationary pressures and fears of contagion from the Greek debt crisis.
The central bank, which sees inflation falling further, said risks from domestic fiscal policies and potential spreading impact from Greece's woes had increased.
The bank said there was "a relative heightening of domestic risks related to the fulfillment of fiscal and incomes policy objectives...and of uncertainties related to developments in external markets amid recent tensions regarding the public finance crisis in Greece."
"These factors may complicate the recovery prospects for the Romanian economy," it said, adding further compliance with the terms of the European Union state's rescue package led by the IMF was "essential" for recovery.
The Fund provided a 20 billion euro ($26.6 billion) aid package last year but has cut its forecast for economic growth in Romania to 0.8 percent for 2010 as the economy reels from a 7.1 percent contraction in 2009.
MISSED TARGETS
Bucharest admitted on Sunday it missed some targets agreed with the IMF earlier this year in exchange for aid and talks with a reviewing team of Fund experts were "complicated."
Romania recorded a government budget deficit of 1.5 percent of gross domestic product in the first quarter, a touch below a quarterly cap agreed with the IMF.
But with tax receipts lower than expected, analysts have said the government might have met the cap by postponing some payments and gathering arrears.
Ten out of 15 analysts in a Reuters poll released on Monday had seen a quarter-point rate cut on May 4, while four expected a half-a-percent cut and one saw rates unchanged.
Any future rate cut would likely be of a quarter-point size, analysts said.
"If a possibility for slashing rates does exist it won't be more that 25 basis points (in the rest of 2010)," said Rozalia Pal of Unicredit Tiriac Bank.
With markets wary over Greece's ability to implement austerity measures attached to its 110 billion euro bailout deal [ID:nSGE64208W], analysts had expected Romania's monetary authority to slow the pace of easing in order to avoid any sharp depreciation of the currency.
The leu currency
The central bank, which targets inflation at 2.5-4.5 percent this year, also cut the rate on its deposit facility and the lending Lombard by 25 basis points to 2.25 and 10.25 percent per year respectively. ($1=.7508 Euro) (Additional reporting by Luiza Ilie and Marius Zaharia; Editing by Ian Jones)