Brussels - The European Union's executive on Tuesday approved a Latvian government plan to support banks in the crisis- stricken country, one of Europe's worst-hit victims of the current financial turmoil.

The plan, worth up to 10 per cent of Latvia's total economic output, allows the Latvian government to take over distressed banks and gives sweeping guarantees on loans and deposits in a bid to stabilize the country's jittery financial sector.

But the plan is bound by strict rules on when the government could use those rights, and is initially set to last for six months.

That means that it follows European Commission rules that state aid must be limited in scope and duration, so that banks protected by the scheme do not receive an unfair commercial advantage.

The commission "therefore concluded that the scheme was an adequate means to remedy a serious disturbance of the Latvian economy," a statement released in Brussels said.

Since Latvia joined the EU in 2004, its small, lightly regulated economy has consistently recorded both the highest growth rates and the highest inflation in the bloc.

That growth was principally fuelled by domestic consumption driven by a booming market for consumer borrowing.

And it left Latvia extremely vulnerable to the shocks of the current financial crisis.

In recent months the economy has gone into reverse, with analysts predicting a severe recession and rumours of an impending devaluation of the national currency, the lats, sweeping the country.

On Friday the International Monetary Fund approved a 7.5-billion- euro (10.5-billion-dollar) stabilization package for the Baltic state. (dpa)