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UPDATE 1-Serb cbank warns of deeper economic slump in 2012

* Cbank now sees GDP shrinking 1.5 pct - vice governor

* Expects rebound with 3 percent growth in 2013

* Sees inflation soaring to 12 percent this year

(Adds details)

BELGRADE, Oct 10 (Reuters) - Serbia's ailing economy will shrink faster than previously thought this year, weighed down by poor harvests caused by a long drought, the vice governor of its central bank said on Wednesday.

Gross domestic product would decline by 1.5 percent rather than the 0.5 percent drop the bank had been forecasting, Veselin Pjescic told a news conference.

It would then bounce back with growth of 3 percent in 2013, driven by rising exports and investments.

As well as trying to fend off the spillover from the euro zone debt crisis, the economy is struggling against a domestic backdrop of soaring public debt, high inflation and unemployment and a weak dinar currency.

That combination prompted the central bank to raise benchmark interest rates, already the region's highest, by 25 basis points to 10.75 percent on Tuesday.

Pjescic said inflation would soar to 12 percent this year, fuelled by the poor harvest as well as a government decision to narrow the 2012 budget gap via a rise in value-added tax.

Inflation, which stood at 7.9 percent in August, would continue to rise until the first half of 2013, when it would begin to drop to within the bank's target band of four percent, give or take 1.5 percentage points.

The economic recovery next year will be underpinned by higher production of Fiat 500L compact cars in a 1 billion euro ($1.29 billion) joint venture between the Italian carmaker and the government, Pjescic said.

Serbia is also burdened by a 28 percent unemployment rate and the Socialists/nationalist government has increased its borrowing to finance its deficit and tame rising social discontent.

Last month it issued a $1 billion Eurobond and hopes for a $1 billion loan from Russia, planned for this year and next. The country also wants a new stand-by loan deal with the International Monetary Fund to reassure investors.

Earlier this month the IMF forecast Serbia's economy would contract by 0.5 percent this year and grow 2 percent in 2013.

The fund froze a 1-billion euro ($1.3 billion) loan deal with Belgrade in February over broken spending promises and last month told the government to restore the autonomy of the central bank and rein in spending as conditions for new loan talks.

Pjescic said tight monetary policy had helped the dinar

recover against the euro since mid-September, as had a programme of government-subsidised loans to exporters.

The dinar has been trading at an average of 115 per euro since mid-September against 117.5 before then.

($1 = 0.7711 euros)

(Reporting by Aleksandar Vasovic; Editing by John Stonestreet)

((aleksandar.vasovic@thomsonreuters.com)(+381113044930))

Keywords: SERBIA CBANK/