PRAGUE (Reuters) - When Britons Jean Mallock and Kathryn Newbould planned their trip to Prague, friends regaled them with tales of great beer and food way below prices at home.
On arrival, they were stunned by how much they spent at pubs and restaurants.
"We were really surprised," said Mallock, a 23-year-old project manager from Nottingham, as she sipped a drink in the historic Old Town. "Especially in the centre, prices are really the same as in Britain ... food and spirits particularly."
Higher prices are due to inflation and appreciation in the crown currency which has lifted what was once a low-cost jewel for tourists to nearer the price levels of Rome or Barcelona.
The crown has gained 41 percent against the dollar, 36 percent against the pound and 25 percent against the euro since the Czech Republic joined the European Union in 2004.
Those gains have been a boon to Czechs looking to buy foreign goods such as cars and electronics. But the exporters who are crucial to the country's economic growth are suffering, as are hotels and restaurants which depend on foreign visitors.
Inflation is rising and reached 6.9 percent in July, and the higher prices have affected robust growth in tourism.
Following an explosion in construction that has created more rooms than visitors can fill, some hotels have slashed prices to stay afloat, a process that could benefit tourists short term, but may spell doom for some operators.
"I think some hotels may go bankrupt," said Pavel Hlinka, President of the Association of Hotels and Restaurants in the Czech Republic.
Prague gets four million tourists a year, roughly the same as Vienna. But it has about 75,000 hotel beds, 50 percent more than in the Austrian capital.
The crown has been one of the world's best performing currencies, thanks to economic growth of around 5 percent a year over the last decade and investors' belief that Czech salaries and prices will continue to catch up with those in richer neighboring countries.
Over the last 12 months, it has outperformed regional peers such as the Polish zloty and Hungarian forint, which have also risen significantly. The rise prompted the Czech central bank to knock the crown back by cutting interest rates last week, which makes it less attractive to speculative investors.
The crown fell to a six-week low last week, but is still up almost 12 percent against the dollar and 9 percent versus the euro this year, hitting tourists in the wallet.
Dinner for two at mid-range restaurant Ambiente, including three courses and a bottle of wine, now costs about 2,100 Czech crowns, or $135. Cocktails cost around 120 crowns, or $8.
That's a significant jump from what many previous visitors may recall of the charming ex-communist city in around 2001, when the same dinner bill would have been only $50.
The Czechs' most famous product, beer, now costs around $2 a pint at a regular Czech pub. That's still cheap by Western standards but well above the roughly 25 U.S. cents it cost when the dollar, pound and euro were at their strongest.
Although designed for expatriates rather than tourists, the Mercer's Worldwide Cost of Living survey from March shows Prague jumped to 29th place from 49th in terms of prices, ahead of Barcelona, Brussels, Berlin and other major western cities.
State agency CzechTourism still expects visitor numbers to rise by up to 4 percent this year, an uptick from around 2.3 percent a year ago.
The difference is that more visitors now come from countries such as Russia, Ukraine and Kazakhstan, rather than for western Europe where Prague is no longer seen as cheap. "It is possible that there will be a (downward) fluctuation," said CzechTourism spokeswoman Marketa Chaloupkova.
Many local firms are now desperately calling for a fast adoption of the euro -- like in neighboring Slovakia, which will join the euro zone on January 1 -- and putting an end to the crown's appreciation against the common European currency.
The Czech government has not set a target for euro zone entry. It wants living standard of living, some 72 percent of the EU average, to rise more gradually.
Many analysts say euro zone entry could happen only in 2014 or later, giving the crown years more to firm.
That may not be good news for tourism firms. But according to Tomio Okamura, spokesman for the Czech Association of Tour Operators and Travel Agencies, a more important issue is raising the quality of services that has not caught up with prices.
"Because of the crown we have to become a luxury destination, but our level of services is not keeping up," Okamura said.
British tourist Mark Rose agrees. He did not think he was getting the right value for how much he pays in Prague, but said this wouldn't spoil his holiday. "I would recommend here but I would warn people that it's quite expensive," he said.
Editing by Michael Winfrey; editing by David Stamp