DUBLIN (Reuters) - Ireland's economy will grind to a virtual halt this year, the central bank warned yesterday as it added to pressure for further deep spending cuts even though public finances showed further signs of stabilising.

Brian Cowen, the most unpopular Irish prime minister in modern history, will unveil a four-year plan next month for tackling the worst budget deficit in the EU and chances that economic recovery will help narrow the gap appear remote.

The Central Bank of Ireland cut its growth forecast for Gross Domestic Product (GDP) this year to 0.2 percent from 0.8 percent previously and said that, given international fears about Ireland's finances, the government could not shy away from steeper cuts despite the bleaker outlook.

"Against the background of sharply increased concerns about fiscal sustainability, the main priority in the short term is to ensure that the 2011 budget credibly demonstrates the first step of a reprogrammed tighter fiscal plan," the central bank said in its latest quarterly bulletin.

Separately finance ministry data showed Ireland's budget deficit swelled to 13.4 billion euros ($18.4 billion) at the end of September from a 12.1 billion shortfall at the end of August.

Tax revenue of 22.2 billion euros in the first 9 months of 2010 was in line with what the government had budgeted for at the start of the year, however, and the annual rate of decline slowed to 6.5 percent from nine percent at the end of August.

"The numbers are in line which is a relief of sorts," said Dermot O'Leary, chief economist at Goodbody Stockbrokers. "I think the pressure on the government to do more in the way of cuts in the budget is due to market movements rather than fears of a further deterioration in the public finance picture."

Cowen shocked taxpayers but calmed some investor jitters last week when he revealed a clean-up bill for the country's banks of up to 50 billion euros following years of reckless lending during the boom years of the "Celtic Tiger" economy.

The bank bill will quadruple Ireland's debt levels from 25 percent of GDP before the crisis to an estimated 99 percent and means Cowen will have to make fiscal adjustments next year above an initial target of three billion euros.

The premium investors demand to hold Irish debt rather than German Bunds, which blew out to a record 475 basis points last week, has narrowed since and eased further to 415 bps on Monday on the prospect of Irish pension funds buying bonds.

Analysts warned, however, that a continued diet of bad news on the economy for Ireland's recession-weary consumers could tip the country into another slump.

"The concern I have now is that the dreadful news every day of the week and the front page of every newspaper is depressing people and affecting consumer sentiment to the point that you could have some kind of double-dip scenario in Ireland," said Eoin Fahy, chief economist at KBC Asset Management.

Ireland's deficit is expected to blow out to an eye-watering 32 percent of GDP this year but stripping out the cost of the latest bank bailout the central bank predicted it would be around 11.6 percent, nearly four times the EU limit. Cowen has promised to get the deficit to under three percent of GDP by 2014.

The government still has a GDP growth forecast of one percent for this year but is set to publish new forecasts this month.

On a Gross National Product basis, viewed as a better gauge of the domestic economy because it strips out profits of multinationals operating in Ireland and interest payments on foreign debt, the economy will shrink by 1.7 percent this year, the third straight year of decline, the central bank said.

The GNP forecast highlights how Ireland's growth prospects are almost entirely driven by exports and at the mercy of global demand.

Reflecting the threat of further slowing international growth, the central bank warned a downgraded GDP growth forecast for next year of 2.4 percent was at risk of being trimmed further.

It had forecast 2011 GDP growth of 2.8 percent in its previous quarterly bulletin and 2.2 percent for GNP.