UPDATE 1-Sweden stems bond sales, fears looming liquidity crunch

(Adds Debt Office comment)

STOCKHOLM, Feb 21 (Reuters) - Sweden will sell fewer bonds this year because of a burgeoning budget surplus, its Debt Office said on Wednesday, adding that any further cuts could prompt investors to quit the market due to a lack of liquidity.

The Debt Office forecast the central government would run a surplus of 80 billion Swedish crowns ($9.9 billion) in 2018, compared to a forecast surplus of 47 billion crowns in October.

As a result it would cut its issuance of government bonds - its fifth reduction in two years - to 32 billion crowns in 2018 and 30 billion crowns in 2019, it said.

"A further reduction is not appropriate since it would risk worsening market liquidity so much that investors might leave the market," the authority said in a statement.

Bond market liquidity has been hit by regulatory changes and stronger government finances in recent years, and by a more than 300 billion crown central bank quantitative easing program.

The Riksbank held around 45 percent of the stock of government bonds at the end of 2017 and around 22 percent of the stock of inflation-linked bonds.

In a sign of market strains, volumes in the Debt Office's repo facility have soared since the central bank started buying bonds.

The Debt Office forecast a budget surplus of 45 billion crowns in 2019, versus a 55 billion crown surplus seen previously.

The issue volume of government bonds will be reduced from 2 billion crowns per auction to 1.5 billion as of March 2018. ($1 = 8.0950 Swedish crowns) (Reporting by Simon Johnson, Daniel Dickson and Johan Sennero; editing by Alexander Smith)