SEOUL (REUTERS) - South Korea's top government think-tank cut its economic growth forecasts on Wednesday for both this year and next, warning that its latest projections faced a bigger risk of the economy weakening rather than getting stronger.

The Korea Development Institute said in a scheduled report that Asia's fourth-largest economy would grow by 3.5 per cent next year after expanding by 3.4 per cent this year, both down from growth of 3.8 per cent and 3.7 per cent forecast in May.

The new projections are slightly below the central bank's latest projections of 3.9 per cent growth for next year and 3.5 per cent growth for this year, although the Bank of Korea is due to revise its forecasts in January.

The institute cut its forecasts on almost all components of gross domestic product, including private consumption, capital investment, exports and imports. But it slightly upgraded its view on construction investment for both this year and next year.

Construction spending will probably grow by 4.7 per cent next year after gaining 2.7 per cent this year. This was higher than growth of 3.8 per cent and 2.6 per cent seen before - a response to government measures to boost the housing market.

While cutting next year's inflation forecast to 1.8 per cent from the previous 2.3 per cent, the institute said inflation would be just above 1.0 per cent when excluding a planned increase in cigarette prices next year.

It repeated its recent warning that South Korea faced increasing deflationary risks and repeated its call for an aggressive policy response from the central bank.