by Mabvuto Banda

LILONGWE, June 17 (Reuters) - Malawi may lose millions of dollars in donor pledges for its 2008/09 budget if a political feud between the government and opposition is not resolved, the head of the U.N. mission in Malawi said.

"Malawi desperately needs to pass the budget and, frankly, if there is no budget you can't get budget support and much of the donor assistance coming to Malawi comes as direct budget support," Michael Keating told Reuters in an interview on Monday.

The opposition alliance of United Democratic Front (UDF) and Malawi Congress Party want with President Bingu wa Mutharika's breakaway Democratic Progressive Party (DPP) to be resolved before the first passage of the budget.

The opposition parties say that according to the constitution wa Mutharika's party should lose 60 legislators he is accused of poaching when he quit the UDF.

The impoverished southern African nation relies heavily on donor money for its public spending and had expected to receive some 90 billion kwacha ($640 million) in assistance in the 2008/09 financial year, a 36 percent increase from last year.

"If there is no budget, donors will have to either reduce aid levels or provide it outside the budget," Keating said.

The political crisis delayed passage of the budget last year until pressure from the international community and civil society forced opposition legislators to back down.

The draft 2008/09 budget allocates more resources to the agriculture sector with more spending on food production and health care, and proposes a 20 percent salary increases for civil servants.

"We will not pass the budget if section 65 is not evoked by the Speaker (of parliament) and if the current crisis talks fail to reach a compromise," George Ntafu, UDF leader in parliament said on Monday.

Section 65 is a constitutional provision which prohibits floor crossing.

Government and the opposition leadership have been in crisis talks for a month to help resolve the impasse. (Editing by Gordon Bell and Matthew Tostevin)

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