By Ivana Sekularac and Valerie Hopkins
BELGRADE (Reuters) - Serbia averted an early election but risked unnerving foreign investors as the largest party in the coalition government agreed on Wednesday to the sacking of the finance minister.
Prime Minister Ivica Dacic, a Socialist, proposed on Tuesday that the government drop Finance Minister Mladjan Dinkic and his United Regions of Serbia (URS) party, a junior partner in the coalition.
Deputy Prime Minister, Aleksandar Vucic, who heads the largest party, the Serbian Progressive Party (SNS), said his party presidency had accepted Dacic's proposal at a meeting on Wednesday morning.
"Elections are not the best solution for Serbia. Facing a myriad of important contracts, stability is important," Vucic said. He was referring to prospective government deals including a strategic partnership between the United Arab Emirates' Etihad Airways and loss-making Serbian flag carrier JAT, to be signed on Thursday.
He said that the remaining coalition partners would decide on candidates for the cabinet reshuffle by August 20.
Without the 16 seats of Dinkic's URS, the coalition retains a slim majority in parliament and the Balkan country avoids the prospect of a snap election, which would almost certainly have delayed its talks on joining the European Union.
But his departure is a concern for investors worried about Serbia's growing budget gap and public debt, which have all but buried hopes of a new precautionary loan deal with the International Monetary Fund.
"The exit of the URS moves the coalition's axis to the left, and reduces the chances of much needed reform," Timothy Ash, Standard Bank analyst, wrote in a note on Wednesday.
In early afternoon, the dinar currency traded at 113.95 to the euro, having earlier slipped to 114.28, prompting central bank intervention, traders said. A central bank spokeswoman confirmed the intervention, and said the amount of euros sold would be announced later in the day.
Data published on Wednesday showed a slowdown in the economy, which grew just 0.7 percent year-on-year in the second quarter compared with 2.1 percent in the first, according to a preliminary estimate.
Dinkic has served as central bank governor, finance minister and economy minister under several administrations since the ouster of Serbian strongman Slobodan Milosevic in 2000, when the country began emerging from a decade of war and economic turmoil.
He led an unpopular budget reform process this year, trying to stabilize Serbia's finances and pull the economy out of recession. Analysts say he would have taken a harder line in cutting public sector wages and pensions, but was reined in by Dacic's Socialists, who were strongly against.
(Reporting by Ivana Sekularac and Valerie Hopkins; Editing by Mark Trevelyan)