By David Milliken and Peter Griffiths

LONDON (Reuters) - Britain's finance minister said on Wednesday he would break a key debt-cutting promise and warned that growth will be weaker than expected in a bleak outlook that could damage his party's hopes of winning a 2015 election.

In a budget update to parliament, George Osborne said weak growth meant he would be a year late in meeting a self-imposed target of seeing debt falling as a percentage of Britain's national output by 2015/16.

Painful austerity measures must be extended by a further year into 2017/18 and welfare payments will be cut in real-terms as Britain faces economic headwinds from the euro zone debt crisis and weak global growth.

"Britain is on the right track. Turning back now would be disaster," Osborne told parliament to jeers and roars of disapproval from opposition politicians. "It is a hard road, but we are getting there."

The economy was now forecast to grow by only 1.2 percent in 2013, well down from the 2 percent predicted in March, Osborne said, citing figures from the independent Office for Budget Responsibility.

The government's fiscal watchdog expected the economy to shrink by 0.1 percent in 2012, compared to a prediction of 0.8 growth in March, and grow by 2 percent in 2014, compared to the 2.7 percent previously forecast.

The sluggish economy has wrecked the Conservative-Liberal Democrat coalition's original plan to wipe out a large structural budget deficit before the next parliamentary election due in 2015.

LABOUR ON ATTACK

The opposition Labour Party accuses Osborne of stubbornly sticking to a failed austerity plan that has choked off growth, sapped demand and eroded much-needed tax revenues.

"Today after two and a half years we can see, and people can feel in the country, the true scale of this government's economic failure," Labour finance spokesman Ed Balls told parliament.

Balls asked if the euro zone was such a drag on the UK's recovery, why had the currency area grown faster than Britain.

"It is simply reckless and deeply irresponsible of this Chancellor to plough on with a fiscal plan we all know is failing on the terms he set," he said.

Osborne says he had no choice but to deal with a record budget deficit left by the last Labour government, which was voted out in 2010. As a result, he said investors still flocked to the British government bond market, keeping borrowing costs at record lows.

Nonetheless, Britain could be in danger of losing its prized triple-A credit rating before long.

Cameron is trailing Labour by around 10 points in the polls after a bruising year marked by weak growth, criticism of his austerity measures and an unpopular budget in March that led to a series of policy U-turns.

The government made dealing with Britain's budget deficit -- which hit a record above 11 percent of GDP before the 2010 election -- its biggest priority when it came to power and staked its reputation on bringing it down sharply.

Osborne told parliament that Britain's deficit would fall every year until the next election, adding: "Yes the deficit is still far too high for comfort. We cannot relax our efforts."

In a raft of announcements, Osborne said he would consult on new tax incentives for the shale gas industry, extend a high-speed rail line into northwest England and launch a new 1.5 billion pounds finance facility to support UK exports.

Under pressure to do more to restore growth, he said he would cut the main rate of corporation tax by 1 percent. It will stand at 21 percent from April 2014. However, a bank levy rate will rise to 0.130 next year to offset that.

In total, the measures were "fiscally neutral", he said, neither pushing money into nor taking it out of the economy.

The chances of Osborne masterminding a strong recovery in time for voters to feel the benefits before a 2015 election appear to be shrinking. Only one in five voters trust him to fix the economy, according to a Comres/ITV News poll.

(Additional reporting by Matt Falloon, editing by Guy Faulconbridge and Mike Peacock)