CAMBRIDGE, March 6 (Reuters) - Latin American countries need deep reform of their institutions as well as strong policies to recover from the "lost decade" of the 80s and recent turmoil in some of the biggest economies of the region, the governor of the central bank of Chile said on Saturday.

Vittorio Corbo said great strides had been made in Latin America, home to 530 million people, but that implementing fundamental long-needed reforms should prevail over searching for new cures to the region's long-standing economic malaise.

"We don't have to invent anything new," the central banker said at a conference on Latin America hosted by the Sloan School of Management at the prestigious Massachusetts Institute of Technology.

"We need to do what we haven't in the last 30 years," he added.

Many challenges faced Latin America, Corbo said, and governments now had to prioritize developing strong institutions able to formulate policies that would protect the region's economies from contagion and shocks.

He also cited fiscal responsibility, flexible exchange rates, more openness to trade and better access to markets in developed economies as fundamental for Latin America's economic success.

THE LOST DECADE

The region enjoyed moderate growth in the years following World War II, but suffered greatly through the debt crisis of the 1980s, which became infamously known as the "lost decade."

Modest growth ensued through the 1990s, but after Argentina's meltdown, a struggling Brazil and much political instability a decade later, the region's $3.7 trillion Gross Domestic Product is only about half of that of Europe or Asia.

With some currencies almost worthless, 225 million people living under the poverty line, massive debt burdens and rampant unemployment, political tension now hinders reform.

"(Political instability) is an epidemic and is now happening all over the place," Jamil Mahuad, former president of Ecuador said.

Mahuad painted a bleak picture of the situation in Latin America, telling the conference that "no matter who's in power or the political orientation of the government, the capacity of the government to deliver is always lower than the expectations of the people."

The former statesman also decried the alarming drop of direct foreign investment in Latin America in the last three years and said this had bred social unrest.

"The worst thing we can do is ignore reality and think that things can change when the figures show us they are not and people keep getting angrier," he said.

MEDIUM CANCER

Mahuad added that some had tended to downplay the true depth of the Latin American crisis in recent years.

"We have at least a medium cancer and we keep hearing analysts talking about it like it's a mild flu," he said.

Others bashed the United States for trying to impose its model in economies that need slow reform. Lenders such as the International Monetary Fund have come under fire from critics for pushing an American economic model in countries that are not ready to sustain it.

"We have to stop thinking that Latin America is the United States," said Roberto Rigobon, a professor at MIT. "We are not, we cannot do 'search and replace'. We have to (reform) slowly and implement policies."

The World Bank, however, continued to see a light at the end of the tunnel for Latin America.