* Romania initiates talks on possible aid
* Polish GDP data hints at slide into recession
* Hungary launches budget reshuffle, eyes tax cuts
(Releads with Romanian aid package)
By Justyna Pawlak
BUCHAREST, Jan 29 (Reuters) - Romania has started talks with the European Commission on a potential rescue loan to shore up its strained finances, an EU official said on Thursday, underlining a deepening of financial woes in eastern Europe.
Hungary also launched a $4.5 billion budget reshuffle to combat the economic crisis and data showed Polish growth slowed at the end of 2008, with several analysts saying it could now slip into recession in the first half of 2009.
Ratings agency Fitch predicted the export-dependent Czech economy would shrink by 1.5 percent in 2009 due to vanishing demand for its products in western Europe, but it said its sovereign debt rating was safe due to low debt levels.
Once seen by most analysts as insulated from the global turmoil, central and eastern Europe is now facing a downturn that has prompted economists to slash growth forecasts and sent policymakers scrambling for measures to stave off the crisis.
Latvia and Hungary have secured rescue packages from the EU and IMF as states sought outside support to plug gaping holes in their finances or to calm spooked markets.
Many economists predict Romania and southern neighbour Bulgaria may be next as the global crisis cuts off sources of cash to fund their vast current account deficits.
An EU delegation arrived in Bucharest this week, parallel to a regular mission from the International Monetary Fund, and talks on aid were likely after Romanian President Traian Basescu said this week an EU loan may be needed.
"They will discuss macroeconomic stability and probably they will talk about the possibility of giving Romania financial support," Nicolae Idu, head of the EU delegation in Bucharest told Reuters. "President Basescu ... has discussed (with the EU Commission) the possibility of getting European financial aid worth 6-7 billion euros. This discussion is now initiated."
The IMF has said a rescue package is not on the agenda of its mission this week.
RESCUE WHO?
Bucharest's 5-week-old government faces a dilemma this year because continuing loose fiscal policy may spook markets and trigger a financing crisis but the economy could slide into recession without additional cash.
Diplomats also warn about social discontent likely to be triggered by budget cutbacks as unemployment is on the rise.
There have been no mass protests in Romania so far, in contrast to its southern neighbour Bulgaria where riots rattled the governing coalition earlier this month as fears of economic pain and anger over poor policy-making reached boiling point.
Violent protests also broke out this month in Lithuania and Latvia, both seen mired in recession this year.
DWINDLING OUTPUT
Reacting to drying up demand from the West, local companies have slashed production, cutting thousands of jobs across the region. Some major producers have halted factories temporarily or cut back to four-day working weeks.
Preliminary data from the EU's biggest ex-communist state, Poland, showed growth slowed to 4.8 percent in 2008 -- a touch below forecasts and down from 6.7 percent a year earlier.
Piotr Kalisz, Chief Economist at Citi's Bank Handlowy, said the numbers indicated fourth-quarter growth fell compared with the previous three months, largely due to declining investments and because a paucity of credit was starting to affect firms.
Polish Central Banker Miroslaw Pietrewicz on Thursday said he was in favour of further "decisive and significant rate cuts" following Tuesday's larger-than-expected 75 basis point cut.
Central banks across the region have slashed rates as concern over sliding growth replaced last year's worries that inflation could spiral out of control.
Poland has cut by 1.75 percentage points to 4.25 percent since November and the Czechs by 1.25 points to 2.25 since August, and Hungary has taken back two thirds of a 300 basis point hike in October.
In Hungary, Prime Minister Ferenc Gyurcsany said his government would reshuffle around 1 trillion forints ($4.57 billion) worth of budget items by slashing personal income tax and employers' social contributions to boost the economy.
He said a 4 percent "solidarity" tax on corporations and the wealthy introduced in 2006 should be eliminated. But he proposed offsetting the revenue loss with a modest rise in the value added tax (VAT), the elimination of some tax allowances, a wealth tax on the richest and the reduction of social spending.
"A joint and comprehensive reform of the tax, social and employment systems is needed," Gyurcsany said. He did not specify the exact size of tax cuts and rises planned. (Reporting by Radu Marinas in Bucharest, Balasz Koranyi in Budapest, Adrian Krajewski in Warsaw, and Jason Hovet in Prague; Writing by Michael Winfrey and Justyna Pawlak)