KIEV, Dec. 23 – Talks between Ukraine and the International Monetary Fund over $2 billion in emergency lending collapsed after the government failed to approve its 2010 budget, officials said Wednesday.

The talks now switched towards the government seeking the IMF’s approval to use the National Bank of Ukraine’s foreign exchange reserves to pay for Russian natural gas imports in December.

“All next installments we can receive only after the approval of the budget for the next year,” Prime Minister Yulia Tymoshenko said at a press conference.

The development is a major setback for Tymoshenko, who has been seeking the emergency funding as her cash-strapped government stuggles to stay financially afloat.

Deputy Prime Minister Hryhoriy Nemyria, Tymoshenko’s foreign policy chief, and two senior officials from the finance ministry held the talks with IMF leaders in Washington last week.

The government scrambled earlier this week to try to push the 2010 budget draft through Parliament, but lawmakers have essentially ignored the plea by voting Wednesday to cancel the remaining two sessions on Thursday and Friday.

This means the government will be entering the fiscal 2010 year - which coincides with the calendar year - without the approved budget for the first time in more than 10 years.

It underscores Tymoshenko’s weakening political clout less than one month before the next presidential election at which the prime minister is running as one of the candidates.

The failure to approve the 2010 budget in December means the government will be restricted from spending more than 1/12 of the country’s overall spending in 2009 each month next year.

Meanwhile, as prospects for receiving the fresh money from the IMF have collapsed, the government is now focusing on getting the IMF’s approval to use the NBU’s forex reserves to pay for gas imports.

Tymoshenko said the decision was “approved” in Washington that would allow easing stress on the budget even without getting the new installment, but she had refused to elaborate.

A person familiar with the situation said the government now hopes to get the clearance from the IMF within a week to use the NBU’s reserves for paying for gas imports.

“This is still under discussion,” the person said. “We still need to figure out how much we want to use and tell the IMF.”

The NBU has $26 billion in foreign exchange reserves after spending $10 billion this year through interventions to support the hryvnia, the local currency, according to Valeriy Lytvytskiy, the NBU’s chief economist.

The IMF disbursed $10.6 billion in three installments to Ukraine since the approval of a $16.4 billion two-year stand-by loan in November 2008.

Meanwhile, President Viktor Yushchenko, who criticized Tymoshenko’s economic policy over the past two years, on Wednesday said he will oppose the allocation of NBU’s reserves to help the government pay bills.

“These are the national reserves of the country, not of the international organization,” Yushchenko said. “I am categorically against this position.”

“This government has no moral right to get into the national reserves of the country,” Yushchenko said. “This is the policy of collapse that the prime minister is pursuing.” (tl/ez)