Hungary's economy is in a ''very grave situation,'' a government official said, adding to concern about Europe's sovereign debt crisis, weakening the euro and pushing the forint to a 12-month low.

''It's clear that the economy is in a very grave situation,'' Peter Szijjarto, spokesman for Prime Minister Viktor Orban, said today in Budapest. ''I don't think it's an exaggeration at all'' to talk about a default.

The comments sparked concern that Europe's debt crisis would spread to eastern Europe. European governments crafted a 750 billion-euro ($1.08 trillion) financial backstop for the euro area last month after Greece's widening budget deficit threatened to shatter confidence in the single currency.

Hungary is ``in no way near default,'' former Finance Minister Peter Oszko said today. Public debt was 78 per cent of gross domestic product last year, compared with 115 per cent for Greece. The new government's communication is ''part of short- term political tactics,'' and loosening fiscal policy ``would escalate panic'' among investors, Oszko said in an interview.

Orban, who took office May 29 after winning elections with pledges to cut taxes and stimulate the economy, yesterday failed to get European Union approval to widen the budget deficit.

''I'm staggered by these comments,'' said Tim Ash, global head of emerging-market research and strategy at Royal Bank of Scotland Group Plc, referring to Szijjarto's statements. ''It's ridiculous, remarkable and extremely dangerous. What message does this send to foreign bondholders? You will look to protect your investments.''

Forint falls

The forint fell as much as 2.8 per cent and was down 1.8 per cent at 286.71 per euro as of 5:06 p.m. in Budapest. The currency dropped 2.5 per cent yesterday after Lajos Kosa, a deputy chairman of Orban's Fidesz party, said Hungary had a ''very slim'' chance to avoid a Greece-like situation. The benchmark BUX stock index fell 4.4 per cent, and credit-default swaps on Hungarian government debt rose 69 basis points to 391.5, according to CMA DataVision.

Societe Generale, Unicredit and Raiffeisen International Bank led European banks lower on concern the sovereign-debt crisis may spread to Hungary and other central and eastern European countries.

Societe Generale fell as much as 9.1 per cent and traded down 7.7 per cent at 31.54 euros by 4:54 p.m. in Paris. Raiffeisen dropped 8.4 per cent to 31.12 euros in Vienna, and Unicredit declined 4.9 per cent to 1.572 euros in Milan.

The previous government, which pledged to narrow the budget gap to 3.8 per cent of gross domestic product this year, ''manipulated'' figures and ''lied'' about the state of the economy, Szijjarto said.

'Moment of truth'

A fact-finding panel appointed by Orban's government will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will prepare an action plan within 72 hours after the report, based on its findings, he said.

''The moment of truth has already arrived in Greece and it has yet to come to Hungary,'' Szijjarto said. ''The government is prepared to avoid the road that Greece has been down; in other words, we won't hesitate to act after the truth becomes known.''

Hungary, which needed a bailout to avert a default in 2008, is in its fifth year of cost cutting and reduced the deficit to 4 per cent of GDP last year from 9.3 per cent in 2006, the EU's widest at the time.

'Uncomfortable measures'

Orban has vowed to end austerity and cut taxes to accelerate economic growth after the worst recession in 18 years. He pledged to ''fight'' the deficit after meeting European Commission President Jose Manuel Barroso yesterday.

The government may be preparing to backtrack on earlier commitments, said Zoltan Torok, an analyst at Raiffeisen Research in Vienna.

''The doomsday words of Fidesz politicians about the dire state of the budget are designed to cool down the expectations of the voters and to prepare them for potentially uncomfortable measures,'' Torok said in a note to clients.

Hungary's debt level may reach 79 per cent of GDP this year, on par with Germany and making it the most indebted eastern EU member, according to the European Commission. The forecast compares with 80 per cent for the EU as a whole, 86 per cent for Portugal, 118 per cent Italy and 125 per cent for Greece.

''Investors are losing their patience,'' Gyorgy Barta, a Budapest-based economist at Intesa Sanpaolo SpA, said in a phone interview. ''This is part of a communications strategy that wants to tell voters one thing and the markets another. It's getting too complicated, and the government now needs to come clean and present a convincing plan of fiscal consolidation.''

Szijjarto said Hungary will seek to improve the fiscal balance and boost the economy's competitiveness at the same time. The government won't give up plans to lower taxes, even if the budget deficit is about 7 per cent of gross domestic product, as State Secretary Mihaly Varga indicated earlier.

''The directions are clear: tax cuts, simplifying the tax system, supporting economic growth and boosting competitiveness,'' Szijjarto said.