RIGA (AFP) - As Latvia struggles to pull itself out of the maelstrom of economic collapse, concern has mounted that the Baltic state's crisis could spill beyond its borders in an echo of Asia's 1997 meltdown.

"There are quite strong similarities in what has been going on in Central and Eastern Europe and what happened in Asia before the Asian crisis in 1997 in terms of increased internal imbalances and strong credit growth," Lars Christensen, chief economist at Danske Bank, told AFP.

"Obviously Latvia stands out by far as the most imbalanced of all the Central and East European states and the pressure there is massive.

"If you look at the economic contraction there, it is much, much wider than what we saw during the Asian crisis," he said of Latvia, an ex-Soviet 2004 EU entrant of 2.3 million people that expects its economy to shrink by 18 percent this year.

Arguing that the peg of Latvia's lat to the euro is a sign of financial credibility and crucial to its goal of joining the eurozone, Riga is adamant that it will not remove it to devalue the currency.

The country's central bank has ploughed around a third of its foreign currency reserves into protecting it.

Analysts warn that maintaining the peg appears increasingly untenable as the country faces by far the worst recession in the 27-member EU and that devaluation could have a domino effect.

"Any devaluation in Latvia would put tremendous pressure on the neighbouring countries, on Estonia, on Lithuania," said Christensen.

He also pointed to other EU newcomers like Bulgaria, Romania and Hungary, whose similar predicaments make them possible targets for devaluation contagion.

However, Marten Ross, deputy governor of Estonia's central bank, told AFP his country was "adjusting well" to the crisis and discounted devaluation rumours.

"The ongoing global economic recession just boosts such (devaluation) rumours but speculators are often not aware of the buffers which the Estonian financial system and the state budget have," he said.