UPDATE 1-Hungary scraps cbank tax, removes aid talks hurdle

* Transactions tax was stumbling block in talks with IMF/EU

* Govt cuts growth fcast, announces deficit-cutting plan

* Raises chances that deal may be reached on financing backstop

* Forint jumps 1 pct (Adds details)

BUDAPEST, Oct 5 (Reuters) - Hungary abandoned a plan on Friday to tax financial transactions by its central bank, removing a stumbling block in credit talks with the International Monetary Fund and European Union.

The plan drew strong criticism from abroad, where institutions and policymakers viewed it as part of an attempt by Budapest to exert a stronger influence over monetary policy.

Economy Minister Gyorgy Matolcsy said the central bank would now be exempt from the new tax, which will be levied on financial transactions by commercial banks and the state treasury from 2013.

"Our partners raised objections against this (tax on the central bank), what's more the European Commission flagged a possible infringement procedure against Hungary," Matolcsy said.

"Therefore, in the budget we no longer reckon with the transaction tax levied on the central bank and we will inform both the IMF and the European Commission about this."

The volatile forint rallied over 1 percent after the minister's remarks.

To compensate for the central bank's exemption from the tax, the minister announced a string of new deficit cuts for both this year and next to keep the fiscal shortfall below the European Union's 3 percent of economic output ceiling and avert the loss of vital EU funding.

($1 = 218.98 Hungarian forints)

(Reporting by Gergely Szakacs and Krisztina Than; Editing by John Stonestreet)

((gergely.szakacs@thomsonreuters.com)(+36 1 327 4748)(Reuters Messaging: gergely.szakacs.thomsonreuters.com@reuters.net))