UPDATE 3-Centre leader backs Soc Dem's Lofven for second PM term

Social Democrat leader Stefan Lofven took a big step toward a second term as Sweden's prime minister on Friday after agreeing a deal with the centre-right Centre and Liberal parties that includes tax cuts and reform of the labour market.

Politics has been deadlocked since a September election resulted in a hung parliament and complicated by a promise from all parties not to work with the anti-immigration Sweden Democrats, a party with roots in the white-supremacist fringe and which holds the balance of power.

"This is not the solution we would ideally have liked, but it is the best that is possible in an extremely difficult situation," Centre leader Annie Loof told reporters.

A deal with Lofven - and the Green Party - could still be blocked by the executive body of any of the four parties involved. These executive bodies have the final say.

Some Liberal and Centre lawmakers have expressed strong opposition as a deal would probably mark the death of the four-party centre-right Alliance, formed in 2004 to end the Social Democrats' century-long domination of Swedish politics.

Furthermore, the parties together would still control fewer than half of the seats in parliament, so would still require the support of the Social Democrats' allies in the Left Party.

The draft agreement with the Social Democrats would ensure that parties on the outer edges of Sweden's political spectrum - the Sweden Democrats and the former communist Left Party - were excluded from influencing policy, Loof said.

Loof said the Social Democrats had agreed to cut income taxes, to abandon a proposal to limit the profits of private firms operating in the tax-funded welfare sector and to increase environmental taxes, among other policies.

(Reporting by Stockholm Newsroom; editing by Niklas Pollard and Gareth Jones)

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