* Civic Democrats discuss coalition with two other parties
* Proposed cabinet expected in coming weeks
* Budget cuts key item on agenda
* Talks slowed by disputes over cabinet jobs
(Adds analyst, more on coalition talks)
By Robert Mueller and Jason Hovet
PRAGUE, June 28 (Reuters) - Czech President Vaclav Klaus
appointed centre-right Civic Democrat leader Petr Necas prime
minister on Monday to lead a government likely to focus on cost
cutting and reform of the pension and health systems.
The Civic Democrats have been holding coalition talks with
two smaller centre-right parties, TOP09 and Public Affairs,
after the three won a total of 118 seats of 200 in last month's
election on pledges of austerity and fighting corruption.
Necas, 45, is aiming for an agreement by mid-July to form a
government that can quickly draw up a cost-cutting 2011 budget,
but the talks have been prolonged by arguments over the
allocation of portfolios.
Outgoing Prime Minister Jan Fischer, who has headed a
caretaker cabinet for more than a year, will stay on until Necas
submits his proposed line-up.
"This country needs a stable government, an efficient
government, a government that will work on fundamental problems
that threaten the country," Necas said after his appointment.
"It is a question of the budget ... We have to actively
tackle the state budget for next year and other years." (For a
factbox on Necas, click []).
Investors, analysts and rating agencies cheered the victory
of the austerity-minded parties as the most-likely grouping to
rein in the budget and make pension and health reforms.
The parties have agreed to cut the 2011 fiscal deficit to
4.8 percent of economic output at least, from 5.3 percent
planned for 2010, by reducing money for state salaries and
ministry budgets across the board, along with other measures.
They have generally agreed not to raise taxes, but analysts
and the outgoing finance minister have said hikes were needed.
SHIFT TO RIGHT
The Czechs and other central European states have mostly
kept budget gaps below levels seen in more developed states
during the economic crisis and have debt loads below the EU
average. But they still need to make savings to bring deficits
in line with the EU's 3 percent deficit-to-GDP ceiling.
The Czech centre-right victory was part of wider shift in
central Europe to right-leaning parties, with the Czech result
almost mirrored in a June Slovak election.
In Hungary, the centre-right Fidesz swept out the previous
socialist government in April by winning a more than two-thirds
majority in parliament.
The Civic Democrats would get six seats in the new cabinet.
The conservative TOP09 and the centrist Public Affairs, both in
parliament for the first time, would have five and four seats.
TOP09 has lobbied for the important finance portfolio for
its vice-chairman and former finance minister, Miroslav
Kalousek, but many Civic Democrats have resisted this.
Public Affairs has raised the possibility it may not join
the government but would support it in lower house votes. It has
made the interior minister post a condition for participation.
Political analyst Jan Kubacek said the demands may be a sign
negotiations are near conclusion, and that it would be seen
badly by the parties' voters if they did not form a government.
"(The parties) are likely to come to an understandable,
clear solution, because the public wants transparency," he said.
If the three agree, they would have the biggest government
majority since the Czech Republic split with Slovakia in 1993.
This would give it the power to launch reforms in pensions
and healthcare, in which the country of 10.5 million has lagged
behind neighbours because cabinets over the past decade lacked
the will or the mandate to carry them through.
(Additional reporting by Jan Korselt; writing by Jason Hovet;
editing by Jan Lopatka and Philippa Fletcher)
