UPDATE 1-Portugal bailout seen successful, risks remain, says IMF

* Portugal mulling two-, three-year bond issuance

* Economic turnaround seen later this year

* Risks include European slowdown, programme slippage

(Adds IMF mission chief's quotes, details)

LISBON, Jan 18 (Reuters) - Portugal's fiscal adjustment under its EU/IMF bailout has "reasonably strong" prospects of success despite significant risks and Lisbon's strategy for returning to bond markets is viable, the IMF said on Friday.

"Regaining market access within the period that Fund resources are outstanding is feasible, though risks of delays remain," the International Monetary Fund said in a staff report following a sixth quarterly evaluation of Portugal's bailout.

The bailout covers Portugal's financing needs until September and investors are increasingly confident Lisbon will be able to tap the medium-term bond market before then.

The IMF said the Portuguese government was already "actively engaging with potential investors, including through roadshows, with a view to issuing debt at two- or three-year tenors when market conditions allow".

Portugal has embarked on its first major investment roadshow since receiving its bailout in 2011, while a newspaper reported Lisbon plans a five-year syndicated bond soon.

"Implementation capacity and prospects for programme success remain reasonably strong," the IMF said. It warned though that the social and political climate was becoming "markedly more difficult" as the country's worst recession since the 1970s stokes unemployment and crimps disposable income.

The government expects the economy to shrink about 1 percent this year, but says it should improve towards the end of the year leading to 0.8 percent growth in 2014.

The IMF said an economic turnaround could begin later this year, but cautioned that "further adjustment needs and the recession in the euro area represent significant risks to the growth outlook".

"It's not time at all for complacency, more fiscal adjustment is needed," IMF mission chief Abebe Selassie told a conference call. Reiterating previous IMF comments, he said that Portugal "is already at the limit of the tax potential" and had to act more on the spending side.

The IMF expects Portugal to have met its 2012 budget deficit target of 5 percent of GDP despite a drop in tax revenues due to the recession, largely thanks to one-off revenues. They included proceeds from the sale of the ANA airport operator concession worth some 0.7 percent of GDP.

This year's budget deficit target of 4.5 percent of gross domestic product remains appropriate in the fund's view.

It said it welcomed the government's pledge to identify contingency measures to offset fiscal risks. It saw one risk coming from a possible ruling by the Constitutional Court against huge tax hikes included in this year's budget.

Several opposition political parties have challenged the tax hikes in court.

Still, Selassie said the court would not throw the programme as a whole off course as "only a relatively small part of the budget provisions has been asked to be revised". He also promised to be flexible and open about possible alternative government measures.

Recent corporate debt issuance in Europe at lower rates, including in Portugal, was an encouraging sign for the economy despite many risks, Selassie said.

"We are beginning to see signs of some confidence returning to corporate sectors that ... point to more positive developments in months to come. The picture is uncertain, but it's not all darkness and gloom," he said.

(Additional reporting by Daniel Alvarenga; Editing by Susan Fenton)