By Luiza Ilie

BUCHAREST (Reuters) -Romanian President Nicusor Dan said on Tuesday he could nominate a prime minister this week provided pro-European parties reach an agreement on measures needed to lower the European Union's highest budget deficit and prevent a ratings downgrade.

Centrist Dan, who won a divisive presidential vote in May that saw the far right gain ground, must form a ruling majority that has until the end of June to approve deficit cutting measures to avoid a downgrade to below investment grade.

The European Commission, ratings agencies and analysts have said Romania cannot reduce its shortfall over seven years to the EU's 3% threshold as agreed without hiking taxes, but Dan and the four pro-European parties have proved reluctant to enforce unpopular measures, focusing instead on cuts to state spending.

"There is a hierarchy of priorities, first cutting useless state spending, then merging some institutions, rescheduling some investments to 2026 and lastly possible tax hikes," Dan said during a visit to neighbouring Moldova.

"I hope we will reach to the tax side as least as possible."

Dan said the parties had identified a list of 60-80 possible measures, but had yet to agree on any.

The president, who has a semi-executive role, added that pending the talks he could nominate a PM this week.

Two sources told Reuters ratings agencies had told a London panel in May they were ready to downgrade Romania from the last rung of investment grade unless they saw convincing measures including tax hikes. The next rating review is in August.

Earlier this month the European Commission opened the possibility of freezing some EU funds for Romania next year.

'SOLID PLAN' NEEDED

Brussels, ratings agencies and the IMF have said hikes to value added tax or changes to Romania's flat 10% tax on income would be the most effective.

"It needs to be a solid plan, two big measures that everyone can price are better than 50 that nobody can evaluate," one of the London sources said. "How can anyone trust you that you'll do what's needed in the 7-year adjustment plan?"

Claudiu Nasui, a lawmaker from the centre-right Save Romania Union, one of four pro-EU parties engaged in talks, is a strong proponent of state spending cuts inspired by Argentinian President Javier Milei.

He told Reuters that he had identified 34 billion lei ($7.73 billion) worth of cuts that could be made in the second half of the year without cutting healthcare, education and defence.

However, they included cutting state-funded investment schemes that were easier to tap than EU funds with little oversight, a political instrument for mayors that parties were unlikely to approve cutting.

"Any measure to cut the deficit will make parties unpopular, spending cuts or tax hikes, you just need political will," Nasui said.

"I often look at a street trash bin outside my office, there are always people rummaging in it. Hiking taxes will not hit us, but it will hit those poor people."

($1 = 4.3977 lei)

(Reporting by Luiza Ilie; Editing by Andrew Cawthorne)