RIGA (AFP) - Latvia faces a choice between a bad economic scenario and a worse one, the crisis-stricken country's Prime Minister warned after increased pressure from Sweden.

"If we have a choice between a bad scenario and a worse scenario... then we'll go with the bad scenario," Dombrovskis said on Latvian radio.

The EU and top regional investor Sweden -- the two leading donors to the bailout -- have in recent days increased the pressure on Latvia to live up to its spending-cut pledges.

Sweden's Finance Minister Anders Borg said that international lenders were losing patience with Latvia, that the country must hike its budget cuts and fulfill the loan terms to receive the agreed $1.4 billion in Nordic payments before the turn of the year. The Swedish minister’s comments sparked new speculation that Latvia may be forced to devalue its euro-pegged currency.

According to the premier, the bad scenario involves fulfilling pledges to the International Monetary Fund, the European Union and other lenders which put together a 7.5-billion-euro (11-billion-dollar) bailout for the Baltic state at the end of last year.

Under that deal, Latvia committed itself to slash 500 million lats (711 million euros, 1.035 billion dollars) from the 2010 budget.

But Riga has so far struggled to find savings of more than 325 million lats. It has been seeking leeway from lenders as its drive to pare public services to the bone and slash welfare benefits runs into increasing domestic controversy and sparks splits in Dombrovskis' five-party, centre-right coalition.

"Larger cuts in expenditures will mean a steeper fall of Latvia's economy," Dombrovskis warned.

Dombrovskis said it would nonetheless be even worse to jeopardise the rescue package, which is helping keep the country of 2.3 million people afloat.

The premier has regularly raised the spectre of national bankruptcy since taking office in March after the crisis helped bring down Latvia's previous government.

"It's likely we'll need to conduct additional measures on fiscal consolidation," he said Wednesday after meeting with President Valdis Zatlers.

"Corrections will have to be made on both the spending and the income sides," he warned.

The EU and top regional investor Sweden -- the two leading donors to the bailout -- have in recent days increased the pressure on Latvia to live up to its spending-cut pledges.

Riga is meant to cut its swollen public deficit -- the shortfall between public revenues and spending -- by 500 million lats a year to bring it down progressively to 3.0 percent of gross domestic product in 2012.

Latvia, which broke from the crumbling Soviet bloc in 1991 and joined the European Union in 2004, had enjoyed years of robust economic growth before plunging into recession last year. Its economy is expected to contract by 18 percent this year.