Portugal to hold snap general election June 5

LISBON (Reuters) - Portugal's president dissolved parliament on Thursday and set a snap general election for June 5, warning the next government faced an "unprecedented economic crisis."

President Anibal Cavaco Silva's decision came as the country faces acute economic challenges that threaten to push it to follow Greece and Ireland in seeking a bailout from the European Union and International Monetary Fund.

Prime Minister Jose Socrates resigned last week after the opposition rejected his government's austerity measures, prompting downgrades by rating agencies, pushing bond yields to new euro-era highs and raising pressure on the country to ask for a bailout.

"I took the decision to call a general election given the clear degradation of the political situation, shown by the growing difficulty of the minority government and the opposition in agreeing on measures to overcome the economic and social problems Portugal faces," the president said.

The economic challenges mounted on Thursday as the country missed its budget deficit goal for 2010.

"The next government will face an unprecedented economic and financial crisis," the president said. "The country's difficulties are so deep that nobody can have the illusion that they will disappear from one day to another."

All opposition parties and the ruling Socialists had urged Cavaco Silva to call elections as soon as possible, the president said.

The opposition had rejected the idea of a coalition cabinet to avoid an election, and has also ruled out pre-election alliances, highlighting a dramatic increase in polarization and antagonism among the parties.

The main opposition, the centre-right Social Democrats, lead in opinion polls and believe they can win a majority in parliament. Only one minority government has completed its full term since Portugal's decades-long dictatorship ended in 1974.

PRESIDENT SAYS COMITMENTS HAVE TO BE MET

Socrates' government will remain in power until the election in a caretaker capacity with limited powers. Finance Minister Fernando Teixeira dos Santos said Thursday the caretaker government would not have the powers to seek a bailout.

The president, whose influence is likely to increase until a new government is elected, said the country has to ensure "the financing means necessary for the economy to function."

"The state has to meet its commitments and nobody should avoid doing what has to be done to protect our future," he said.

Cavaco Silva urged all parties to cooperate on this matter. Social Democrat leader Pedro Passos Coelho told Reuters last week he did not rule out a possible bridging loan if financing conditions become acute before the election.

Economists have focussed on two large Portuguese bond redemptions in coming months. Most of them say the country has raised enough funds this so far this year to be able to repay around 4 billion euros ($5.63 billion) in April.

The National Statistics Institute said Thursday the country's budget deficit reached 8.6 percent of gross domestic product in 2010, above a target of 7.3 percent agreed with Brussels. The news sent yields up sharply to new euro lifetime highs.

Socrates insists the country can do without a foreign aid package.

(Writing by Axel Bugge; Additional reporting by Filipa Lima, Daniel Alvarenga and Sergio Goncalves; editing by Mark Trevelyan)