UPDATE 1-Italy to cut deficit, stick to EU budget rules

(Recasts with EU's Dombrovskis)

VIENNA, Sept 7 (Reuters) - Italy understands it must cut its structural deficit and start reducing public debt in its 2019 budget, European Commission Vice President Valdis Dombrovskis said in a tweet on Friday after talks with Italian Finance Minister Giovanni Tria.

The reassurance from Tria, on the sidelines of a meeting of European Union finance ministers in Vienna, follows remarks from Italy's ruling coalition leaders earlier this week, who also sought to calm market concerns over Rome's fiscal plans.

"Very good meeting with Finance Minister Tria," Dombrovskis tweeted. "We have a shared understanding of the economic situation and the objectives of the next budget to bring the debt on downward path and pursue an improvement of the structural deficit."

Investors have heavily sold Italian debt since the coalition government of the far-right League and the anti-establishment 5-Star Movement was formed in June because the coalition's leaders have been promising to spend more and tax less.

To do that, Italy, which already has a debt of 132 percent of GDP, would have to increase its budget deficit, adding to market concern about its ability to repay. Last week, Fitch rating agency changed the outlook for Italian debt to negative from stable because of the expected higher borrowing.

But as the costs of borrowing for Italy rose, government coalition leaders toned down their rhetoric, pledging not to "blow up public accounts" and to phase in its economic program. Yields started to decline in response.

Italy, like all other euro zone countries, will have to submit its draft budget for next year to the European Commission by mid-October for checks to see if it is in line with EU rules. Should the draft blatantly break EU laws, the Commission has the option of sending it back to be changed.

EU rules oblige governments to keep cutting the structural deficit -- a measure that strips out the effects of the business cycle and one-off income and spending -- until the budget is in balance or in surplus.

Under EU rules, Italy should cut its structural budget deficit, seen at 1.7 percent of GDP this year, by 0.6 percent of GDP in 2019.

This might be difficult, because even with no change in policies, let alone higher spending and tax cuts, the structural deficit will rise next year to 2.0 percent of GDP, the European Commission forecasts. (Writing by Jan Strupczewski; Editing by Alison Williams)