UPDATE 4-Australia parliament rejects stimulus plan

(For a factbox on what happens next, click [nSP421057])

CANBERRA, Feb 12 - Australia's parliament rejected the government's A$42 billion ($28 billion) stimulus plan on Thursday, dealing a major blow to Prime Minister Kevin Rudd and delaying cash payments to millions of workers and families.

The government was one vote short of passing the laws in the upper house Senate. The government said it would reintroduce the bills in the lower House of Representatives later on Thursday, and urged the Senate to reconsider its stand as early as Friday.

Analysts said the measures were expected to pass eventually, but the delay in distributing cash handouts worth A$12.7 billion could add to the case for a further interest rate cut to stem the fallout in Australia from the global economic slowdown.

"These measures are urgent and in the national economic interest," Rudd told parliament, after suffering his biggest parliamentary setback since he won office in late 2007.

"This government will not be deterred from taking whatever action is necessary in the national economic interest to underpin this country's and our people's economic well-being."

The Australian dollar fell from $0.6580 to $0.6540 after the Senate vote, and later was below $0.65 cents in offshore trade. Government Senate Leader Chris Evans said the vote would hurt confidence in the Australian economy and put jobs at risk.

Those concerns were highlighted by official data which showed the unemployment rate hit its highest in more than two years in January, climbing to 4.8 percent from 4.5 percent in December.

Rudd had said the stimulus spending was needed to protect Australia's economy from falling into recession due to the impact of the global downturn.

The Senate voted to sit again on Friday and could vote on the package again when it meets then, but only if the government can work out a compromise deal with key independent senator Nick Xenophon, who voted against the stimulus bills.

Xenophon told Reuters he would meet Treasurer Wayne Swan later on Thursday. He declined to comment further on his stance.

The government needed the support of the Greens party and two independents, including Xenophon, to get the laws through the Senate.

HELD UP OVER RIVER

The stimulus package fell short over a relatively minor issue, with Xenophon wanting the package to include measures to speed up the spending of A$3 billion to support the ailing Murray-Darling river system.

"The government has said no, and so I must say no to this stimulus plan," Xenophon earlier told parliament.

If the Senate rejects the laws again after an interval of at least three months, it would give Rudd the option of calling an early double-dissolution election. The next normal election is not due until late 2010.

But Rudd was unlikely to go to an election over the plan, said political analyst Nick Economou of Melbourne's Monash University. The prime minister's high approval ratings were also unlikely to be dented by the defeat, he said.

"Rudd is interested more in getting the stimulus package through than he is in trying to stockpile something to go to an early election," Economou told Reuters.

Rudd announced the new spending on Feb. 3, with A$29 billion for longer-term infrastructure projects in addition to the immediate cash payments.

Economou said the vote meant the stimulus package would be delayed, but was likely to pass eventually.

"The nation's economic future is now held to ransom by a South Australian senator interested in trying to improve water quality, at a time when there is no rain," Economou said.

($1=A$1.52)