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* Would allow 8 pct cut in prices from March
* Outgoing premier hospitalised with high blood pressure
* Protests continue but size dwindling
* Early election likely in May, hung parliament probable
By Sam Cage and Angel Krasimirov
SOFIA, Feb 27 (Reuters) - Bulgarian lawmakers moved to reverse power-price hikes on Wednesday after weeks of mass street protests over austerity measures that toppled the government.
The decision could undermine the low debt and deficit strategy the government needs to maintain confidence in its currency peg to the euro, a strategy designed to boost the competitiveness of the European Union's poorest member.
Prime Minister Boiko Borisov, admitted to hospital with high blood pressure, quit on Feb. 20 following two weeks of sometimes violent demonstrations by tens of thousands of protesters angry at rampant graft and low living standards.
"The situation is tragic. We need a radical change - people took to the streets due to total misery," said opposition leader Sergei Stanishev, whose Socialists (BSP) are running neck-and-neck in polls with Borisov's centre-right GERB.
Six years after joining the bloc, Bulgaria trails far behind other members. Its justice system is subject to special monitoring and it is excluded from the passport-free Schengen zone because of other members' concerns about corruption.
Many protesters are angry with Bulgaria's entire political class, causing more uncertainty over the outcome of early elections expected in May, and government concessions raise the risk of a widening deficit and market pressure.
The changes voted on by parliament allow regulators to change power prices more than the once a year currently allowed, and could pave the way for an eight percent cut from March.
That may not be enough to stop large demonstrations planned for the weekend.
Public anger after five years of recession exploded onto the streets of cities across Bulgaria after electricity distributors raised prices 13 percent. The price rise was implemented in July but began to bite when temperatures fell, especially for the many people who use electricity for heating.
Electricity usage gobbles up a large chunk of the average Bulgarian household's income, especially in winter when temperatures can regularly fall to -15 Celsius (5 F).
CHEAP POWER, POOR CONSUMERS
At 0.087 euros (1 cent) per kWh, the electricity price that is charged to household consumers in Bulgaria is the second lowest in Europe, and compares to 0.298 euros/kWh in Denmark.
But that means little to voters in a country where the average monthly wage is around 400 euros ($520) - less than half the EU average - and pensions are less than half that. Living standards are also less than half the EU average.
Public anger also has focused on the distribution companies in Bulgaria's privatised market, which is divided into three regions, controlled by Czech firm CEZ, fellow Czech firm Energo-Pro and Austria's EVN.
The power firms say they have done nothing wrong and that public anger over utility bills can only be eased by fully liberalising the electricity market. It is not yet clear how cost cuts will hit revenues, as some supplies could be diverted from industrial consumers.
Although Borisov's government ruled out renationalising them, he risked a diplomatic row with Prague and the European Union by threatening to withdraw CEZ's licence due to what it says are breaches of its operating contract.
The outgoing premier had won plaudits from the markets by maintaining tight fiscal discipline, bringing the budget gap down to 0.5 percent of gross domestic product.
Growth is expected to hit just 1.4 percent this year and the loss of sales tax revenue from the power price cut will put the deficit under pressure - and Bulgaria's currency peg.
The imposed price cuts could also deter other foreign investors by sending a message about the risks of doing business in Bulgaria.