UPDATE 6-Britain slashes spending, raises retirement age

* UK to raise retirement age to 66

* UK to cut welfare by extra 7 billion sterling a year

* Health, schools, overseas aid protected

* Osborne raises rhetoric on banks

(Adds reference to bank levy)

By Sumeet Desai

LONDON, Oct 20 (Reuters) - Britain will cut half a million jobs, lift the retirement age and slash welfare as part of an unprecedented cost-cutting drive announced on Wednesday which will test the strength of the economy and the government.

The long-awaited spending review confirmed 80 billion pounds of cuts, sent unions into a fury and turned up the heat on the Liberal Democrats, the junior coalition partners who campaigned against such sharp fiscal tightening before the May election.

The jury remains out on whether the economy -- just recovering from the worst recession since World War Two -- can survive the squeeze which will cut growth by around half a percent each year. Analysts expect the Bank of England to keep monetary policy super-loose for the foreseeable future.

Nor is it clear whether the cuts -- aimed at bringing down a record budget deficit of 11 percent of GDP -- can actually be achieved. More of the burden has been shifted to the notoriously hard-to-cut welfare bill -- an extra 7 billion pounds on top of the 11 billion pounds cuts already announced.

Conservative finance minister George Osborne said that was the best way and would mean that government departments outside protected areas like health and international aid would only see their budgets shrink by, on average, 19 percent, not the 25 percent announced in his budget.

"Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices. And today we make them," the 39-year-old who took office in May told parliament.

He said the state pension age for men and women will rise to 66 by 2020 and that 490,000 public sector jobs were likely to disappear over the next four years.

Conscious of public anger against banks widely blamed for the economic crisis, Osborne also said the financial sector will have to pay its fair share and legislation on a bank levy announced earlier this year will be published on Thursday.

"Our aim will be to extract the maximum sustainable tax revenues from financial services," he said.

EUROPEAN AUSTERITY

Austerity drives across Europe have unleashed a wave of sometimes violent protests. In France, a million people have hit the streets to protest at the retirement age being raised to 62.

Unions in Portugal -- where a minority government is struggling to calm investors by getting an austerity budget through parliament -- have called a general strike for Nov. 24 and Spain's government too has faced down protests to seek budget cuts. [ID:nLDE69J0MW] [ID:nLDE69J0EZ]

"We should look ... to the kind of resistance being mobilised by the French trade unions, which enjoys overwhelming public support, as an example how to repel austerity cuts," said Bob Crow, head of the RMT rail union.

So far, British voters appear to be reconciled to the need for economies. The latest Reuters/Ipsos MORI political monitor on Tuesday showed 38 percent of people believe the centre-right Conservatives have the best economic policies compared with a quarter who preferred the opposition Labour Party's stance.

But voters have yet to see the practical impact of the cuts, whether that means longer waiting times at hospitals, fewer police or less regular rubbish collections -- alongside hikes in national and local taxes.

"The average department will see a 19 percent reduction," said BNP Paribas economist Alan Clarke. "The consensus forecasts imply these will feel like a paper cut -- we believe reductions of this magnitude will feel more like an amputation."

Opinion polls suggest the LibDems, the left-leaning junior coalition partners, are already in trouble. The coalition's key message is that the cuts are fair but the Institute of Fiscal Studies has already branded the spending review "regressive" -- that is to say it will hit the poor hardest.

Markets took the review in their stride and credit rating agency Fitch said it confirmed Britain's AAA credit status.

But analysts say much will now depend on the strength of the recovery. Osborne is banking on a private sector recovery to make up for the cutbacks in the public sector.

"The Chancellor is making some rather heroic assumptions. Households may continue to save and pay down debt rather than spend, businesses may remain reluctant to invest and export performance could suffer from a lacklustre global recovery," said Andrew Smith, chief economist at KPMG.

"With indicators already suggesting that the economy is losing momentum and confidence likely to be damaged by just the announcement of cuts and job losses, further monetary easing may well be necessary to compensate for the fiscal tightening now in the pipeline."

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For graphics on UK economy, please click on

r.reuters.com/ryt39p

For Reuters/IPSOS Mori - UK voting intentions poll

r.reuters.com/red29p

For Insider interview with UK Treasury's Danny Alexander

link.reuters.com/red49p

For other stories on the budget [ID:nLDE6720PZ]

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(Editing by Mike Peacock/Ruth Pitchford)