* Parliament approves centre-left government
* New PM Milanovic vows spending cuts
* Tight budget needed to save credit rating (Recasts with PM quotes, background)
By Zoran Radosavljevic
ZAGREB, Dec 23 (Reuters) - Croatia's new prime minister, Social Democrat Zoran Milanovic, vowed on Friday to cut spending and avoid a financial meltdown as parliament confirmed his reformist cabinet and the country prepared for EU membership.
"Croatia's public finances are overstretched and we just cannot continue borrowing simply because no one will want to lend us any more, and even if they did, we would not be able to pay them back," Milanovic told parliament.
Milanovic's four-party bloc ended eight years of rule by the conservative HDZ party at a Dec. 4 parliamentary election, riding a wave of popular anger over government corruption and economic stagnation.
It won 80 seats in the 151-seat national assembly vowing to improve the business climate, attract investment and boost employment during its four-year term. It will also take Croatia into the European Union on July 1, 2013.
Milanovic's first task will be to enforce sizeable spending cuts and rescue the country's credit rating, currently just a notch above junk status.
This year's deficit was set at 5 percent but could be wider as economic growth is likely to be considerably below the initial forecast of around 1-1.5 percent.
"We are still better than some European countries but the situation is dangerous and we can no longer go on like this ... We have to cut budget spending in nominal and real terms," Milanovic said.
Rating agencies have indicated they may downgrade Croatia next year unless they see fiscal consolidation and the start of long-delayed reform of its civil service, labour laws, pensions and healthcare and the restructuring of loss-making state firms.
A downgrade would further hike borrowing costs for the small Adriatic country of 4.3 million people, whose economy flourished in the 2000s thanks to tourism and banking.
Analysts say that success allowed the government to leave reforms on the back-burner.
Unemployment stood at 17.9 percent in November while a lack of liquidity and growing unpaid obligations have paralysed many local businesses.
Before joining the EU, the government will have to resolve the fate of four indebted shipyards, once a flagship export industry employing almost 10,000 people, which have survived the past decade thanks to fat state subsidies considered illegal in the EU.
It could sell the docks or fond a way for them to run a profitable business without government aid.
The government's longer-term aim is to reform the oversized state administration and attract investors for projects in energy, infrastructure and tourism.
For a factbox on key challenges click on
For penpix of key government members click on (Reporting by Zoran Radosavljevic; Editing by Andrew Heavens)
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