By Ian Talley

WASHINGTON--The International Monetary Fund has urged Ukraine's fragile government to honor its bailout obligations, a sign the fund is concerned a breakdown in the country's coalition could jeopardize its emergency financing package.

Ukraine's ruling coalition broke up on Thursday, with Prime Minister Arseniy Yansunyuk submitting his resignation, jeopardizing passage of a supplementary budget that may be needed for the IMF's executive board to approve the next tranche of financing in late August.

The fund said IMF Managing Director Christine Lagarde discussed the implications of the political developments with President Petro Poroshenko and Mr. Yatsenyuk by telephone on Friday. Ms. Lagarde "encouraged steady implementation of the authorities' reform program, including the policy package recently agreed with fund staff," the IMF said.

After the calls, Mr. Poroshenko said Ukraine is ready to fulfill all its obligations, despite the country's difficult situation.

The Ukraine president appears to be trying to keep the current government in place long enough to pass the supplementary budget, not only to keep the bailout on track, but also to keep the military funded. Ukraine is combating a violent pro-Russian secessionist movement in its east.

The IMF approved the $17-billion bailout in late April, part of a $30 billion international emergency financing agreement to prevent collapse of the economy after the ouster of the pro-Russian government in February.

IMF staff gave the initial green light for the release of the next tranche of bailout cash earlier this month, but warned fighting in eastern Ukraine risked jeopardizing the emergency financing program and that additional cash might be required to keep the economy from collapsing.

The staff-level consent for a $1.4 billion tranche still requires approval by the IMF's executive board, even though that is seen as largely a formality, as the bailout helps the U.S. and Europe keep the new pro-Western government in power.

But if the Kiev fails to meet the basic conditions of the bailout--a raft of policy changes, budget belt-tightening and other measures to stabilize the economy--it would be difficult for the IMF board to justify continued support for the financing. "The program hinges crucially on the assumption that the conflict will begin to subside in the coming months," the IMF said earlier this month.

Write to Ian Talley at ian.talley@wsj.com

(END) Dow Jones Newswires

July 25, 2014 18:11 ET (22:11 GMT)

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