* Economy to expand 1.5 pct, less than government expects
* Unemployment to continue downtrend but at slower pace
* Strong fiscal performance is no substitute for reforms (Adds quotes, details)
By George Georgiopoulos
ATHENS, April 26 (Reuters) - Greece's economy will only grow by up to 1.5 percent this year, the leading IOBE think tank said on Wednesday as it trimmed its forecast due to slow progress on the country's bailout review.
IOBE had projected 1.5 to 1.8 percent growth this year in its previous estimate in January, compared to the 2.7 percent forecast by the government, but has cut that estimate as the protracted review of the bailout has increased uncertainty.
The review of Greece's compliance with bailout-prescribed reforms was supposed to be wrapped up late last year but talks are still ongoing with chief inspectors representing the country's official lenders back in Athens.
"Investments and consumption will offset a negative impact on economic output from the country's external balance, where a large part of consumer spending will leak towards imports," said IOBE head Nikos Vettas, presenting a quarterly economic review.
In nominal terms, gross domestic product (GDP) is expected to increase by 3 percent, taking into account an expected 1.5 percent rise in consumer prices mainly due to higher oil but not significantly increased demand, he said.
Talks over energy and labour reforms, pension cuts and tax hikes have dragged on for months, mainly due to differences between EU lenders and the International Monetary Fund over the country's fiscal targets after its bailout expires in 2018.
Athens has agreed to apply more austerity after its 86 billion-euro ($93.7 billion) bailout, the third rescue plan since the debt crisis began in 2010, ends in a bid to persuade the IMF to take part in the programme, as sought by Germany.
The government hopes a deal on reforms can be reached by May 22, when euro zone finance ministers will discuss the issue. Concluding the review will also unlock funds which Athens needs to repay loans maturing in July.
IOBE expects Greece's jobless rate, the highest in the euro zone, to continue to decline for the fourth consecutive year in 2017 to 22.2 percent, but at a slower pace than last year.
It sees consumer spending growing around 1.2 percent, helped by job creation in export oriented sectors including tourism where pre-bookings point to another good year, transportation and manufacturing.
"In the first months of this year the signals are mixed and we will likely see stagnation as the review talks have dragged on. The resulting uncertainty is weighing in economic sentiment with consumer confidence at a 3.5 year low," Vettas said.
The think tank said Greece's outperformance on the fiscal front last year with a 3.9 percent of GDP primary budget surplus, excluding debt servicing outlays, is positive but should not be seen as a substitute for structural reforms.
Greece's primary budget surplus last year reached 4.2 percent of GDP, under the methodology used by its international lenders in its bailout programme.
"If the surplus is combined with policies that open up the economy then it will be a good basis for growth," Vettas said.
$1 = 0.9182 euros Reporting by George Georgiopoulos; Editing by Ken Ferris