* 2012 cuts worth 4.5 bln euros, rising to 10.5 bln in 2013

* Cuts avoid hike in sales tax until July 2013

* Unions have threatened strikes, centre-left uneasy

By Giuseppe Fonte and Steve Scherer

ROME, July 6 (Reuters) - Italy's cabinet after an almost seven-hour meeting on Friday approved state spending cuts worth 4.5 billion euros ($5.57 billion) this year, heading off an impending sales tax increase and funding emergency help for earthquake stricken areas.

The cuts, which increase to 10.5 billion euros in 2013 and 11 billion in 2014, will push back a 2 percentage point hike in the sales tax until July of next year, and help pay for aid to the industrial Emilia-Romagna region, hit by earthquakes in May.

The package will reduce health expenditures, cut in half the number of provincial governments, gradually trim the number of public-sector workers by 10 percent, and reduce state managers by 20 percent, according to a government statement.

"The cuts will in no way reduce the quality of public services provided to citizens, and instead aim to improve quality and efficiency," Italian Prime Minister Mario Monti told reporters after the marathon meeting.

Job reductions in the public sector have already drawn fire from unions, who have threatened a nationwide general strike.

The plans do not envisage significant lay-offs and will be achieved mainly through hiring freezes and schemes to encourage early retirement. The level of job reductions also refers to planned notional staffing levels rather than the number of people actually employed, which may be lower.

Staffing levels will be assessed by October, and some workers will be sent home for two years on 80 percent of their salary before being laid off or sent into retirement.

Public Administration Minister Filippo Patroni Griffi said after the meeting he could not accurately estimate the number of jobs that would ultimately be cut.

Labour unions, who put up tough opposition to Monti's labour market reforms, which parliament approved last month, are fiercely resisting the job cuts and the centre-left Democratic Party (PD) has also expressed misgivings about the package. "Be careful of creating social conflict," Susanna Camusso, leader of Italy's largest labour union, the Cgil, said this week.

By presenting the package as a decree, Monti will leave political parties less scope to amend and water down the measures. The decree is immediately effective, but must be passed by parliament within 60 days or else it expires.


DEFICIT

Unlike the unions, financial markets may be reassured by the cuts, which show Italy has a handle on its budget deficit even though its economy is mired in a severe recession which shows no sign of easing.

The deficit in the first quarter stood at 8 percent of GDP, up from 7 percent in the same period last year and the highest since the start of 2009.

Borrowing costs fell after last week's EU summit, but rose again on Thursday after the European Central Bank seemed to rule out additional measures to bring down interest rates.

For Monti, preventing an unpopular tax increase, even if it means angering public sector employees, may be a good way to revive his popularity, which is hovering near its lowest level since he took office in November.

Among the decrees included in a 13-page statement is a reduction in the network of small, state-owned companies, a halving of spending on automobiles by the public administration, and a centralisation of the purchase of goods and services by the state, especially in health care.