UPDATE 1-Pakistan PM says country must live within its means

(adds central bank governor's and analyst comments)

By Sahar Ahmed

KARACHI, July 1 (Reuters) - Defending hefty increases in oil and gas prices to limit subsidies, Pakistani Prime Minister Yousaf Raza Gilani said on Tuesday his government wouldn't flinch from unpopular measures needed to stabilise the economy.

"High growth in macroeconomic imbalances testifies that the country was living beyond its financial affordability," Gilani said at the State Bank of Pakistan in a speech to mark the central bank's 60th anniversary.

He said Pakistan had to deal with slowing economic growth, rising inflation, exchange rate instability and widening current account and fiscal deficits.

"Our government is committed to restoring macroeconomic stability in a reasonable timeframe," Gilani said

"Economic liberalisation, deregulation and privatisation in a transparent manner will be the core principles of our economic reform agenda."

On Monday, his three-month-old government announced an increase of up to 31 percent in gas prices, having increased petrol and diesel prices by 10 percent a day earlier without raising subsidy levels.

A senior official told Reuters last month that the government would automatically pass on any increase in world oil prices to domestic consumers and phase out subsidies entirely by the end of 2008. [See:nSIN179382]