(RIGA) - The Latvian government will raise to nearly 85 percent its stake in Parex Banka, the nation's second-largest bank, Prime Minister Ivars Godmanis said Wednesday.

After a special cabinet session on the Baltic state's deepening economic crisis, Godmanis told reporters that the government would increase its holding in Parex to 84.83 percent from the planned 51 percent, via the state-owned Hipoteku un Zemes Banka.

The government -- which is currently in talks with the International Monetary Fund (IMF) to shore up the struggling economy -- had announced last month that it was paying the nominal sum of two lats for the 51-percent stake from the bank's founders and majority owners, Valery Kargin and Viktor Krasovitsky.

It is now due to acquire the rest of Kargin and Krasovitsky's share of Parex, which has been added to the same two-lat deal.

Officials had said Tuesday that the latest announcement was on the cards.

When it acted on November 8 -- after customers had pulled 240 million lats (341.5 million euros, 432 million dollars) from Parex in six weeks -- the government said it wanted to ward off a wider crisis in Latvia's financial sector.

Krasovitsky, who founded Parex along with Kargin in 1992, blamed the exodus on customers attracted by Swedish state guarantees for Nordic rivals Swedbank and SEB, which are respectively the first- and third-ranked banks in the Latvian market.

People familiar with the takeover saga said that the government initially hoped that keeping the founders on board would help it negotiate deals with Parex's creditors and prevent a further run on deposits from the bank.

However, neither goal was reached.

The bank has lost a further 260 million lats in deposits in the weeks since the November announcement, according to Latvian banking authorities.

As a result, the government and Latvia's banking regulatory authority on Monday slapped restrictions on Parex's clients, saying the goal was to prevent a new run on the bank.

Since Monday, individuals can only withdraw up to 35,000 lats a month.

Companies, meanwhile, are permitted to take money out for business purposes. Their limit is 35,000 lats for firms with 10 or fewer employees, 350,000 lats for those with between 11 and 250 employees, while larger companies have no restrictions.

The Parex takeover got a green light from EU regulators last week.

But the bank is not yet formally in government hands because its almost 60 syndicated creditors have still to agree to the deal.

The bank owes 775 million euros in syndicated loans -- almost a fifth of the currency reserves of the Latvian central bank -- which are due for repayment in 2009.

Latvia, a country of 2.3 million people which broke free from the crumbling Soviet bloc in 1991, has been seen as an economic "tiger" in recent years, notably since joining the European Union in 2004.

But after years of double-digit growth, it is confronting the sharpest recession in the 27-nation EU as once-robust domestic demand slumps in the face of high inflation, tighter domestic credit rules and the global economic crisis.

According to official forecasts, the economy may contract 1.5-1.7 percent this year and 3.5-5.0 percent in 2009.

Last month Riga formally turned to the EU and the IMF for a rescue package, joining the ranks of other ex-communist states such as Hungary.

Talks with lenders are underway.

Latvian authorities have said they may seek up to five billion euros to help the country deal with the crisis.

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