MILAN, Feb 3 (Reuters) - The Milan-based think-tank REF has cut its forecast for Italy's gross domestic product (GDP) this year, expecting it to contract by 2.5 percent rather than 0.8 percent as a result of the international economic crisis.
Forecasters have been slashing Italy's growth outlook in recent weeks as the fall-out from a global credit crunch takes its toll on the euro zone's third largest economy.
REF's latest projection released on Tuesday is at the low end of the market consensus.
The mid-range forecast of 20 economists polled by Reuters last month pointed to a 1.9 percent contraction, which would be the steepest drop since 1975.
REF said it expected GDP to fall by another 0.1 percent in 2010.
"The international crisis has hit ... an economy that was already weaker than the others," it said.
REF said shrinking economic activity would weigh on public finances.
It expected the budget deficit to amount to 3.9 percent of GDP this year against a previous forecast of 3.1 percent made in October.
The latest figure is slightly higher than the mid-range forecast of 3.8 percent compiled by the Reuters poll, whose results were published on Jan. 21.
Both forecasts are far above the Italian government's 2.1 percent target and surpass the 3 percent ceiling set by the European Union for its member states.
For 2010, REF sees the deficit rising higher to 4.5 percent.
Italy's debt, the largest in the euro zone and the third largest in the world, would likely reach 108.3 percent of GDP in 2009 and 111.9 percent the following year, it added.
(Reporting by Gilles Castonguay; Editing by Victoria Main)
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