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UPDATE 1-Swedish c.bank warns surging infections to slow recovery

* C.bank says heightened risks in financial system

* Says COVID measures could add to longer-term vulnerabilities (Adds detail, background, graph)

STOCKHOLM, Nov 11 (Reuters) - Sweden’s economy has begun to rebound from the COVID-19 pandemic and measures to halt its spread, but the recent pick-up in new infections will slow the recovery while longer-term risks remain elevated, the central bank said in a regular report.

Sweden’s economy shrank a record 8.3% in the second quarter, but bounced back in the July-September period as global demand returned, helping the country’s large manufacturing sector.

But a second wave of COVID-19 infections is sweeping across Europe and Sweden has registered record figures for new cases in recent days, clouding the outlook.

“The increased spread of the coronavirus during the autumn means that restrictions and changes in behavior will slow down an economic recovery in the near term,” the central bank said in a statement accompanying its Financial Stability Report.

“If the crisis now deepens and becomes more prolonged, further measures may be needed to support credit supply and safeguard financial stability.”

The Riksbank has launched a raft of measures to keep credit flowing while a government package has been aimed at preserving jobs. It said this week it would extend wage support and income compensation for companies hit by the pandemic. However, while emergency measures from authorities will help ease the immediate crisis, they could exacerbate weaknesses in the financial system.

The Riksbank said vulnerabilities “include weak banks and public finances in the euro area, the high level of indebtedness among Swedish households and large exposures to property among the major banks”.

“These may both deepen and prolong the crisis,” it said.

Reporting by Simon Johnson; edited by Johan Ahlander and Niklas Pollard

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