UPDATE 2-Norway plans record election year spending from wealth fund

(Adds finmin quotes, GDP forecast, detail)

OSLO, May 11 (Reuters) - Norway should spend a record amount of cash from its $1.3 trillion sovereign wealth fund this year as it continues to battle the pandemic's economic impact, the centre-right minority coalition government told parliament on Tuesday.

Finance Minister Jan Tore Sanner now proposes withdrawing 402.6 billion Norwegian crowns ($48.66 billion) from the wealth fund in 2021, up from 331.1 billion crowns seen last November.

"Extraordinary economic support measures related to the pandemic account for a large bulk of the increase," Sanner said in a statement.

The government of Conservative Prime Minister Erna Solberg, which lags the centre-left opposition in opinion polls ahead of a September parliamentary election, will now negotiate with the right-wing Progress Party in the hope of passing the budget.

The previous spending record from the fund, set last year, was 369.3 billion crowns, finance ministry budget data showed.

The so-called structural non-oil deficit corresponded to 3.7% of the fund for 2021, the Finance Ministry said, up from 3.2% seen in November and exceeding parliament's long-term guidance of spending no more than 3.0% in any given year.

It would be the second consecutive year of breaking the spending cap, taking advantage of a rule that allows for extra withdrawals in times of economic hardship.

Mainland gross domestic product, also known as non-oil GDP, is now expected to rise by 3.7% in 2021, less than the 4.4% predicted last October.

Norway's economy contracted last year by 2.5%, the biggest economic setback since World War Two.

"Lower infection rates and a rising share of the population being vaccinated give reason for optimism, although uncertainty remains high," Sanner said of the economic outlook.

The wealth fund - which invests proceeds from Norway's oil industry in foreign stocks, bonds, property and renewable energy assets - is worth some $250,000 for every Norwegian citizen. ($1 = 8.2732 Norwegian crowns) (Reporting by Terje Solsvik, editing by Victoria Klesty and Gareth Jones)