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UPDATE 2-Hundary hints at life without IMF deal

* Hungary has stepped up rhetoric against IMF over past weeks

* Forint falls, government bond yields jump after minister's remarks

* Government in a bind between competing expectations-source

BUDAPEST, Oct 29 (Reuters) - ``Life would go on'' if Hungary does not secure funding from the IMF, its chief negotiator said on Monday, casting doubt on Budapest's willingness to reach a deal to help ensure financial stability.

Having requested help from the International Monetary Fund and European Union nearly a year ago after its debt rating was slashed to ``junk'', central Europe's most indebted nation has since sent mixed signals, saying both that a deal could be close but also rejecting the conditions it could carry.

Mihaly Varga, the minister in charge of the talks, said the prospect of a deal would offer little in the way of market improvement.

``Obviously, life would go on that way too,'' Varga told public radio in an interview when asked whether it would be a disaster if Hungary failed to secure an agreement with the IMF and the European Union after months of stop-start talks.

``I would still find it good if we could agree because there would be a minimal, several tenths of a percent, impact of such a deal that could help foreign investors buying government papers feel safer,'' he said.

After the comments, 10-year government bond yields rose 36 basis points and the volatile forint added to morning losses, falling to three-week lows.

The prospect of a financial backstop has largely assuaged investors made nervous by the economic policies from Prime Minister Viktor Orban's government. It has helped stave off a jump in bond yields such as that seen in Greece and Spain.

But tension between Budapest and the lenders has risen in recent weeks after Orban's government launched an ad campaign saying it would ``not give in'' to their demands and unveiled a swathe of tax hikes and other moves that defy IMF advice.

Iryna Ivaschenko, the IMF's representative in Budapest, declined comment on Varga's comments. But on Saturday she said a new round of fiscal measures announced by the government this month ran counter to the IMF's recommendations.

They included reneging on a pledge to halve Europe's highest bank tax as of next year. The government has also doubled a planned tax on financial transactions and launched a new tax on mainly foreign-owned public utilities.

Orban's moves may help him wrestle down the deficit below the 3 percent next year Hungary needs to avoid the loss of millions of euros of EU funds. They also avoid austerity that could further hurt his sliding popularity.

But they are criticised for threatening to stifle an already weak recovery after a recession this year.

Fitch Ratings, which has the country's debt on negative outlook, warned Hungary not to eschew IMF support.

Although preliminary meetings have taken place, no date has yet been set for the next round of talks. Last week marked the first time that economists saw only a 50-50 chance that Budapest would reach an agreement, a Reuters poll showed.

CHEAP CASH

Investors have taken advantage of cheap cash flowing from loose monetary policy in Europe and the United States to snap up high yielding assets, such as Hungarian bonds that yield far more than many of their euro zone counterparts.

Those flows have helped Hungary finance itself from domestic bonds this year. But next year Hungary must repay the equivalent of 3.6 billion euros ($4.66 billion) to the IMF alone from a 2008 bailout that pulled it back from the brink of bankruptcy.

Budapest has nonetheless stepped up its rhetoric against the IMF over the past weeks with the government's media campaign against IMF-prescribed austerity and Orban's declaring the country would not be ruled by ``outsiders''.

``They do not want the IMF deal and they need the IMF deal,'' said Viktor Szabo, portfolio manager at Aberdeen Asset Management. ``The market is slowly and steadily learning that there is no deal in the short or even in the medium term. The two parties concerned are so far away from one another.''

Varga said there were differences in views between the two sides that made an agreement difficult.

``We are working to try and bring our views closer, and have the IMF accept or make them understand why the Hungarian government makes certain decisions,'' Varga said.

IN A BIND

A source close to the government who spoke on condition of anonymity told Reuters that Budapest was in a bind between what he described as competing demands by the EU to keep a low budget deficit and the IMF which expects reforms to boost growth.

``The EU is entirely focused on the deficit while the IMF on sustainable growth,'' the source said. ``There could be a fundamental disagreement between the two approaches.''

The source said the government wanted to signal that it was still interested in a deal but it would not give ground on policy issues such as a flat tax and pension indexing to inflation.

Varga could not say whether the sides would return to the negotiating table this year but said the European Commission's assessment of Hungary's latest fiscal adjustment steps due on Nov. 7 would likely have a bearing on the talks.

``They will decide on the basis of our measures submitted within the framework of the excessive deficit procedure about their involvement in the negotiations. They are also discussing this with the IMF,'' Varga said.