KIEV, July 10 - The International Monetary Fund on Friday drastically worsened its economic outlook for Ukraine and said it would probably approve a $3.3 billion rescue that analysts believe is needed to avert a further meltdown.

The IMF predicted Ukraine’s economy would shrink 14% in 2009, compared with the 8% contraction predicted earlier. Three weeks ago, the IMF had considered worsening the forecast to 12% contraction.

The gloomy forecast comes after the government Prime Minister Yulia Tymoshenko had revealed – for the first time over the past six months – that Ukraine’s economy had contracted 20.3% on the year in the first quarter.

"These revisions mainly reflect the first quarter. Looking forward, we hope there will be a return to growth," Ceyla Pazarbasioglu, the leader of an IMF team, said, adding that government and central bank policies had "allowed the country to manage the crisis, bringing stability to its financial system.”

The revision shows that the IMF – apparently, misled by the government’s decision to postpone the release of the vital economic data - has earlier believed the impact of the economic crisis on the Ukrainian economy had not been so adverse.

The government released the GDP statistics after the IMF had warned the data was needed for the release of the rescue lending.

Pazarbasioglu said Ukraine could expect the third installment from a $16.4 billion standby loan granted last fall within four weeks, pending approval by the fund's board.

The fresh cash also hangs on adoption of legislation to reform Ukraine's bank sector, a challenge given that Parliament has been paralyzed in bitter political rivalries.

Pazarbasioglu, who appeared at a joint news conference with Tymoshenko, said political “consensus” was needed to successfully combat the economic crisis.

“Program implementation will require strong political consensus and commitment at all levels,” Pazarbasioglu said. “We have agreed that ahead of presidential elections there would be a commitment to keep fiscal targets in line.”

The IMF agreed to accept a larger budget deficit of 6% rather than 4%. "We have been flexible in this difficult period, and will support Ukraine as long as good policies continue to be implemented," Pazarbasioglu said.

Tymoshenko said fresh IMF funds would help "minimize losses during the crisis period".

Pazarbasioglu said the Ukrainian authorities have committed to the unpopular measure of regularly increasing prices for hot water and heating for households in order to help cover Naftogaz's expenses.

Tymoshenko said that $1.9 billion of the third installment will be used to cover Ukraine's external borrowings which mature this year, seeking to allay concerns that the country would be unable to pay.

Ukraine is one of the worst-suffering countries in Europe, hit by a shrinking demand for steel, its main export commodities. The national currency, the hryvnia, has lost about 35% of its value to the dollar since last fall. (tl/ap/ez)