UPDATE 4-Mexico sees economy shrinking 2.8 pct in 2009

* Finance ministry steady budget deficit through 2010

* Forecast underscores woes driving Mexico to IMF (Recasts; adds peso quote, background on IMF credit line)

By Miguel Angel Gutierrez

MEXICO CITY, April 2 (Reuters) - Mexico's economy will contract 2.8 percent this year as exports tumble, the government said in a report underscoring the deep troubles that led it to seek help from the International Monetary Fund.

In a report sent to Congress late on Wednesday, the government also said Mexico could run a budget deficit next year to fight back against recession.

Mexican factories that make everything from cars to vacuum cleaner parts are reeling from a fall in orders from the United States, where the economy has contracted sharply in recent months.

"Due to the adjustment in estimates for U.S. growth ... it is deemed convenient to lower Mexico's growth forecast," the finance ministry said in the report.

The forecast was much bleaker than a previous outlook for a 1 percent contraction in 2009 and was roughly in line with private-sector views as the economic crisis deepens.

The report said the government will likely run a federal budget deficit for the second year in a row. It predicted the shortfall could reach 1.8 percent of gross domestic product next year, the same level as planned for 2009 as the state pumps money into the sputtering economy.

Mexico's worsening outlook prompted the government to sign up for a $47 billion IMF credit line on Wednesday, becoming the first major Latin American country to seek an IMF cushion against the global economic crisis.

CURRENCY AND ECONOMY WOES

Mexico's peso currency MXN= has tumbled 28 percent against the dollar since August, hurt by weak exports and a retreat by Wall Street investors from emerging markets.

Currency losses are hurting consumers by fueling inflation and companies by making dollar-denominated debt more expensive to pay back. The peso rose 1.5 percent on Thursday as world leaders pledged more resources to fight the crisis.

Mexico's request with the IMF marked the first time in a decade that Mexico has sought help from the Washington-based lender.

The IMF has already bailed out countries blighted by recent turmoil in global financial markets like Iceland and Hungary, but Mexico was the first to sign up for a new facility offered only to countries with strong economic track records.

Those countries, which are believed to include Brazil and Chile, are nonetheless in rough shape as demand dries up for their exports. Mexico's exports fell 30 percent in February; the country's manufacturers laid off nearly 400,000 workers in the year through February.

The rise in Mexican unemployment to a more than 10-year high is now hitting consumer demand and is likely to make Mexico's looming recession even deeper.

The Mexican government had already warned that Mexico was entering a recession. Deputy Finance Minister Alejandro Werner recently predicted the economy could decline by 1.8 percent this year.

Economic output fell 1.6 percent year-on-year during the last three months of 2008, and the government sees continued contraction at least through the first two quarters of this year. First-quarter GDP data is due in May.

An expected recovery in the United States could drive Mexico's economy to grow 2.0 percent in 2010, the ministry said. (Additional reporting by Jason Lange; Editing by Leslie Adler)