(Adds detail on resolution, context)
By Alessandra Prentice and Pavel Polityuk
KIEV, March 30 (Reuters) - The International Monetary Fund told Reuters on Friday Ukraine should allow the market to determine gas prices as promised under a $17.5 billion loan programme, after the government extended a below-market level pricing system for households.
In 2016, Ukraine agreed to adjust gas prices to be in line with external market rates, but the government's failure to implement the decision means the IMF held back disbursing further loans since it approved a tranche last April.
There is a shrinking window for Ukraine to pass IMF-backed reforms ahead of presidential and parliamentary elections that will take place in 2019 at the latest. The current IMF programme also expires in March next year.
The cabinet has now extended the pricing policy for another two months in a formal resolution published on Friday.
The IMF representative to Ukraine, Goesta Ljungman, said in emailed comments that low prices for households amounted to subsidies that were regressive and helped the largest users the most.
"We believe that it is important to let gas prices - including tariffs for households - be determined by the market, in line with the reforms that were implemented in 2016, and which were one of the major achievements of the reform process in Ukraine in recent years," he said.
He did not comment on how the government's decision affected the outlook for the next loan tranche, but the Fund has previously made clear that adjusting gas prices is a key requirement for further funding.
The Ukrainian central bank has repeatedly warned that Ukraine's economic recovery could be jeopardised if it does not receive further financing under the programme.
Ukraine has received $8.4 billion so far from the Fund, helping it recover from a two-year recession following the 2014 annexation of Crimea by Russia and the outbreak of a Russian-backed insurgency in its industrial east. (Editing by Matthias Williams)