* Latvia becomes 18th member of euro zone

* Second ex-Soviet state to adopt euro

* Recovers from the worst recession in the EU

* Praised as an example of successful austerity program

By Aija Krutaine and Nerijus Adomaitis

RIGA, Jan 1 (Reuters) - Latvia joined the euro zone on Wednesday, banking on its experience of austerity to bring it prosperity in a currency union where other economies have floundered.

The Baltic country of just 2 million people became the bloc's 18th member at midnight (2200 GMT), taking a step further out of the shadow of neighbouring Russia a decade after joining the European Union and NATO.

Latvia's acting prime minister, Valdis Dombrovskis, who led his country through its worst economic crisis since it left the former Soviet Union in the early 1990s, said euro adoption was an opportunity, but not a guarantee of wealth, and the country should not relax its fiscal policy.

"It's not an excuse not to pursue a responsible fiscal and macroeconomic policy," he said after withdrawing the first euro banknote after midnight from a cash machine in Riga.

The euro switchover ceremony took place at a site where Latvia's crisis began - the former headquarters of the collapsed Parex bank, now headquarters of state-owned Citatele bank, which emerged from Parex's ruins.

Parex, the country's second-biggest bank by assets, went bust at end-2008, forcing the Baltic state to seek an international rescue to keep its currency, the lat, pegged to the euro at the same rate.

Its economy shrank by a quarter during 2008-2010, but then grew at the fastest pace in the EU, expanding by 5.6 percent in 2012, after the government slashed spending and wages and hiked taxes in one of the harshest austerity programs in Europe.

Latvia's efforts have won praise from EU policymakers, who have pointed numerous times to the Baltic state as an example that austerity can work.

"Thanks to these efforts ... Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment," European Commission President Jose Manuel Barroso said on Tuesday.

Still, a few concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits, mostly from Russia, in Latvian banks, as in Cyprus, was a risk factor.

Latvia also enters the euro zone without a permanent government after Dombrovskis resigned in December, taking political responsibility over a supermarket collapse in Riga that killed 54 people.

Latvia enters the euro zone as the single currency bloc marks its 15th anniversary, and the euro is now used by 333 million Europeans.