* IOBE says economy to shrink by up to 4.2 pct this year
* Sees it stabilising next year
* Athens still needs to keep public spending in check
By George Georgiopoulos
ATHENS, Oct 14 (Reuters) - Greece's economy may shrink by up to 4.2 percent this year but is close to stabilising after six years of sharp contractions that have wiped out about a quarter of output, influential think tank IOBE said on Monday.
Greece now needs to ensure that wage hikes do not exceed productivity growth and keep public sector spending in check to avoid the return of large fiscal shortfalls, the independent Athens-based think tank said.
In its quarterly report, IOBE said the 183 billion euro economy was set to shrink by 4.1 to 4.2 percent in 2013, revising down a forecast made in July of a contraction of up to 5 percent. The new projection is more in line with the latest estimates by the country's foreign lenders.
"The Greek economy is very close to a stabilisation point," IOBE said. "The twin deficits which reflected its chronic pathology are approaching a balanced level, and the six-year recession seems to be gradually reaching its end."
IOBE's latest outlook chimes with estimates by the European Commission and the International Monetary Fund, which financed Athens' two bailouts. They expect the economy to shrink by 4.0 percent this year, its sixth straight year of contraction and after a 6.4 percent decline in 2012.
The think tank said the economy performed better than expected in the second quarter and further improvement is likely in the third, partly due to a strong tourism season, but it said it expects a weaker performance in the final quarter.
The six-year slump which has left the economy about 25 percent smaller is likely to end in 2014, it said, but it urged authorities to avoid complacency. It did not give a forecast for gross domestic product next year.
"It would be inefficient and unfair for the economy to emerge from the crisis, smaller by one quarter, without having used the crisis to change in ways that will bring growth," IOBE head Nikos Vettas told reporters.
Stability must not be put at risk, the think tank said, urging adherence to two basic rules - wage growth should not outpace productivity growth and the public sector must not spend money it does not have.
IOBE - which was formerly run by Greece's Finance Minister Yannis Stournaras - projected the country's unemployment rate will average 27.5 percent this year, revising down a previous 28.3 percent forecast.
Unemployment was 27.6 percent at the last count in July.
Greece expects to end the year with a primary surplus of 0.2 percent of gross domestic product (GDP) at general government level, and hopes this will bring debt relief from its international creditors.
It also has plans to tap bond markets in the second half of 2014.
"Greece will be able to tap markets and gain independence from official sector financing when markets become convinced that the risk of remission is out of the picture," Vettas said.