By Michael Shields

ZURICH (Reuters) - Swiss voters look set to decide for a second time whether to impose curbs on immigration from the European Union or reaffirm close economic ties with the bloc after the government said on Wednesday the issue deserved another referendum.

The cabinet came out against a popular initiative that would completely overturn a 2014 vote to reduce immigration from the EU, arguing it would not be democratically proper to try to reverse the outcome so soon after voters had spoken.

Instead, it plans its own referendum question which it hopes will put to rest a policy conundrum bedevilling Swiss-EU ties: whether to stem an influx of foreigners into the Alpine Republic, as voters demanded nearly three years ago, or preserve open borders as the price of access to Europe's single market.

"When implementing the (2014) mass immigration initiative you can change the constitution (to impose limits) or the free movement agreement (with the EU) but you can't do both," Swiss Justice Minister Simonetta Sommaruga told reporters after a cabinet meeting in Bern. "You have to decide."

The debate in non-EU member Switzerland mirrors in many ways the situation in Britain, where voters decided in June to quit the EU as a way to control immigration that critics said was putting too much of a strain on social infrastructure.

Under the Swiss system of direct democracy, its voters get the final say, and political analysts think the Swiss would opt to uphold business ties with the EU.

Losing EU bilateral accords may cut output by as much as 7 percent of GDP by 2035, and business leaders decry the impact on finding qualified staff. Still, the EU's faltering reputation could make such a vote a close call.

Swiss parliament is meanwhile debating a step to limit immigration by giving local people hiring preference, with the next vote slated for December.

Proponents say this approach would not violate free movement and thus needs no EU approval, but that view is not shared by Brussels or EU member states that are concerned that any flexibility afforded the Swiss might be seized on by Brexit negotiators.

Sommaruga said the Swiss government will await parliament's decision before crafting by April its counterproposal to the initiative -- known as Raus aus der Sackgasse (RASA), or "Out of the Cul de Sac" -- that asks voters to overturn the 2014 immigration limits vote.

A vote on the RASA initiative and the government's counterproposal would be held simultaneously, but a date has yet to be set.

Political analysts say the Swiss government is reluctant to let RASA go to voters without presenting them with an alternative for fear they would reject it and subsequently cement the 2014 immigration limits in place.

Leaked documents show strategies the cabinet is mulling include removing or diluting the 2014 article on quotas from the constitution, enshrining the supremacy of international treaties over domestic law, or adding an article stressing the importance of ties to the EU, its main trading partner.

(Editing by Toby Chopra)