By Andrius Sytas

VILNIUS (Reuters) - Centre-left parties in Lithuania were expected to win the second and final round of a parliamentary election on Sunday as voters fed up with austerity went to the polls in a contest dominated by public anger over years of tough spending cuts.

Economists said the Baltic nation of about three million was still heavily indebted however and that the incoming coalition - likely to be formed by the Labour Party and the Social Democratic Party - would have little choice but to stick to austerity as it tried to ready the country for euro membership.

Labour and the Social Democrats won 34 of 141 seats in a first round election two weeks ago and are hopeful of winning enough of the 67 seats up for grabs in Sunday's second round to cement their position at the core of a new coalition.

An ex-Soviet state, Lithuania crashed hard when the crisis hit four years ago. It slashed spending but now, after a brutal recession, it is returning to economic health, albeit too late for voters who have seen their spending power eroded and unemployment soar.

The government's failure at the ballot box comes despite widespread praise abroad for a more resolute course on cutbacks than that taken by Greece and other euro zone countries struggling with debt.

But many voters say they have had enough.

"Everything needs to be changed, in the government now only one in 10 people really work, the rest just hang out there," said pensioner Edmundas, 73, who declined to give his full name.

With a 13 percent joblessness rate, Lithuania is one of the European Union's poorest countries and the population has fallen below 3 million for the first time since the Soviet Union's 1991 collapse as thousands have left to find work.

The coalition likely to take over has promised to ease the pain by raising the minimum wage, shifting the tax burden towards the better off and postponing adoption of the euro.

One putative coalition leader has told Reuters that the budget deficit might, at a later date, be allowed to go above the level that euro zone policymakers view as prudent.

But the new government will have to walk a tightrope between pleasing voters and keeping markets happy. If debt markets - which welcomed its predecessor's austerity drive - do not trust plans to ease the belt-tightening, the cost of borrowing could go up so steeply that the country plunges into another crisis.

Lithuania takes over the European Union's rotating presidency in the second half of next year and has to repay a 1 billion euro Eurobond in March.

TENSIONS

Prime Minister Andrius Kubilius, who says cuts to the budget deficit saved Lithuania from bankruptcy, came third in the first round vote and has only a slim chance of remaining in government even though some see a tough budget as painful but necessary.

"I think everything that was needed to be done is already done," said 36-year-old Zana Kovsova, after casting her vote on Sunday. "Now, we need to keep solving the budget. We should continue on the path of austerity so that later we can start to live normally."

Still, change may be in store and the election could be a taste of things to come for other European governments facing voters angry at budget cuts.

The Social Democrats, led by Algirdas Butkevicius, a former finance minister and prospective prime minister, want progressive income taxes to replace flat taxes.

He and Labour, led by Russian-born businessman Victor Uspaskich, will probably need a partner to form a majority, expected to be the party of an impeached ex-president.

In a sign of possible tensions ahead of a coalition deal, Uspaskich has said he may push for a budget deficit above the EU limit of 3 percent of output.

But Butkevicius has said he would be fiscally responsible and that Lithuania could adopt the euro in 2015.

However, Uspaskich says Lithuania should not rush to adopt the euro while the single currency is in crisis and public support is low. The Labour leader is on trial for tax evasion by his party between 2004 and 2006, a charge he denies.

After a collapse in economic output of 15 percent in 2009, the second-biggest decline in the EU after northern neighbor Latvia, gross domestic product (GDP) rose 6 percent last year and is expected to increase by about 3 percent this year.

The budget deficit fell to 5.5 percent of GDP in 2011 from 9.4 percent in 2009. The Kubilius government has drafted a 2013 budget with a 2.5 percent fiscal gap.

Lithuania's politicians were aware pressure from the markets would not allow them to be too generous, said Lars Christensen, chief emerging markets analyst at Danish bank Danske Bank.

"I'm quite happy that this election, no matter the outcome, will not lead to crazy economic policies," Christensen said.

Lithuania needs to borrow 7.6 billion litas ($2.85 billion) in 2013, about 7 percent of GDP, to refinance debt, including a 1 billion euro Eurobond, and to fund the deficit.

"They have their hands tied at the moment," said DNB economist Rokas Bancevicius.

(Writing by Patrick Lannin; Editing by Andrew Osborn)




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