By Maja Zuvela

SARAJEVO (Reuters) - A second straight winter of blackouts and escalating energy prices is hanging over the Balkans as the driest weather in 40 years has depleted water levels and shows no signs of easing.

Hydro power accounts for about a quarter of the region's generation, and with nearly 1,800 MW of coal-fired capacity offline for planned maintenance, utilities may have to turn to costly imports to maintain supply as they did a year ago.

"If the drought continues the situation in the power sector is set to be very difficult and the prices in the Balkans will for sure increase," Vladimir Djordjevic of the Belgrade-based power trading group Rudnap told Reuters.

"Market participants cannot count on any surplus from Romania which had exported a bulk of its electricity and many of Western Balkans capacities are offline."

Romania's troubled state-owned hydro producer Hidroelectrica cut energy deliveries after declaring in August a force majeure - an inability to honor contracts due to circumstances beyond its control - underling Southeastern Europe's acute lack of reliable power generation.

The shortage of hydro power forced utilities to import expensive supplies from countries such as Hungary and Slovenia to meet peak summer demand in August when a heat wave helped drive consumption 20 percent higher than normal.

The drought that has gripped the hydro-dependant region for two years has also wilted crops and left farmers rueing the failure of authorities to upgrade irrigation networks.

The dry weather has also had a ripple effect on power prices outside the Balkans. In Hungary, demand from the Balkans has pushed up power prices far above those of its central European neighbors.

October delivery and Cal '13 baseload on Hungary's HUPX exchange all traded this week at more than 6 euros over both the Czech and German front months at around 57 euros.

Balkan prices for the quarter and front year contract now both trade at 57.5 euros, but traders warn prices will likely climb as winter demand hits, piling more pressure on recession-hit consumers and businesses in the region.

"Supply problems combined with the drought and limited cross-border capacities could further increase the prices in the region," another Balkan trader said.

POWER IMPORTS LOOM

Serbia's Energy Minister Zorana Mihajlovic has said her ministry is looking to secure reserve capacities ahead of the start of heating season to avoid the emergency purchases required during a blizzard last winter when temperatures plummeted to as low as 30 degrees Celsius below zero.

Officials want to avoid a repeat of the storm that forced cash-strapped nations to import power at higher prices and suspend energy supplies to businesses and limit residential use to keep the creaking transmission system from buckling.

"Serbia will have to import electricity mainly because of the drought but the ministry will take good care that imports do not overburden the budget," Mihajlovic said, adding Serbia's EPS utility has paid 120 million euros since February for emergency power imports.

Croatia's utility HEP expects to import 1.5 TWh more power in 2012 compared to years with average water levels while Bosnia's top power utility EPBiH has forecast its 2012 output 20 percent lower than a year ago.

And Czech CEZ's Albania unit said in August it would boost imports to meet rising demand in the solely hydro-dependent nation as weather forecasts predict little rain on the way through the end of the year.

Dejan Vladikovic of Serbia's hydrometeorological service expects a dry October with a brief respite the following month that will do little to fill reservoirs before drought conditions return.

"The only bright spot is the Danube river where the latest rainfall lifted water levels while all other rivers are at their historical lows," he told Reuters.

($1 = 0.7935 euros)

(Additional Reporting By Matt Robinson and Daria Sito-Sucic; Editing by Michael Kahn and James Jukwey)