By Daria Sito-Sucic

SARAJEVO (Reuters) - Bosnia's central government adopted a much-delayed budget for 2012 on Wednesday, setting out wage and spending cuts as the Balkan country seeks talks next month with the International Monetary Fund on a new loan deal.

Political bickering between rival Serb, Croat and Muslim leaders had delayed adoption of the budget and cost the country a B2 to B3 downgrade this month from Moody's ratings agency, in junk territory.

Prime Minister Vjekoslav Bevanda told reporters that his cabinet had adopted a budget of 950 million Bosnian marka ($638 million) for state institutions. The total including foreign debt servicing will amount to nearly 1.4 billion marka.

Finance Minister Nikola Spiric said the draft, which is likely to be debated by parliament next week, reflected new legislation cutting the wages of all public sector workers by 4.5 percent and trimming spending on business trips and perks.

"This budget is restrictive, but sufficient to finance all institutions important for the Euro-Atlantic path," Spiric said, referring to Bosnia's aim of becoming closer to the west.

"I think we have drafted a good budget framework which will make us a credible partner in cooperation with international financial institutions."

Emerging from 16 months of political paralysis after an election in October 2010, Bosnia's central government says it hopes to apply for membership of the European Union within months, but needs to finance the institutions tasked with pursuing the necessary reforms.

Bosnia has a highly decentralized system of government, with the country split after its 1992-95 war into two autonomous regions that frequently lock horns over funding.

The political impasse, with ethnic parties vying over how to form the central government, cost Bosnia access to much-needed foreign funding. The IMF in 2010 froze a 1.1 billion euro ($1.45 billion) standby arrangement over delayed reforms.

With the two regions now forecast to run significant budget deficits this year, the central government says it plans to return to the IMF to negotiate a new loan deal to plug the budget holes. Talks are expected to start in mid-May.

Spiric said the draft budget also included outstanding payments of 20 million marka for war veterans who were forced into early retirement and promised pensions ahead of the 2010 election but were never paid.

Hundreds of the veterans, from all sides to the conflict, have been protesting in front of the government building for almost a month.

(Reporting By Daria Sito-Sucic; Editing by Matt Robinson/Jeremy Gaunt)