Spain's Socialists punished in local elections

MADRID (Reuters) - Spain's ruling Socialists suffered a crushing defeat in local elections on Sunday, punished by voters after a week of protests over the EU's highest unemployment level and a stagnant economy.

The Socialists lost municipal strongholds Barcelona and Seville as well as the Castilla-La Mancha region where they have ruled for 28 years, and could end up with clear control of only two or three of Spain's 17 autonomous regions.

The centre-right opposition Popular Party, or PP, had a 10 point lead in the aggregate nationwide vote, the worst defeat for the Socialists in municipal polls since Spain returned to democracy in 1978 after the Francisco Franco dictatorship.

"These results have a clear relation to the economic crisis we've suffered for three years... I know that many Spaniards are going through great difficulties and fear for their jobs and future well being," Socialist Prime Minister Jose Luis Rodriguez Zapatero said in a brief news conference.

PROTESTS AHEAD OF VOTE

The vote was preceded by a week of mass non-violent protests. Tens of thousands of Spaniards fed up unemployment of 21 percent demonstrated in cities nationwide.

"I've voted for the PP because the Socialists are doing a very bad job ... It's true there's been a worldwide crisis, but Zapatero didn't react to it on time," said Jesus Lopez, a retired man voting in the Arguelles neighbourhood of Madrid.

Spain's economy has barely emerged from recession and tepid growth has been aggravated by austerity measures. Almost half of Spaniards aged 18-25 are out of work, more than double the European Union average.

On Saturday night, the eve of voting for more than 8,000 city councils and 13 out of the country's 17 regional legislatures, protests swelled to about 30,000 people in Madrid's Puerta del Sol square alone.

It was unclear whether protests would continue post the elections. So far, unions have not joined the protests, but if Popular Party leaders start implementing tough spending cuts at the city and regional level, social unrest could increase.

ZAPATERO RULES OUT EARLY ELECTION

Zapatero ruled out calling early elections, saying he would continue to pass legislation to strengthen the economy using existing alliances with small parties in Parliament, where the Socialists are the biggest minority.

But the bigger-than-expected victories for the PP will increase pressure on the unpopular prime minister to step aside before his term is up in March 2012. Analysts said most of the pressure will come from within the Socialist party.

"I don't think Zapatero will last to March. I think there will be early elections. The situation is unsustainable," said Jose Maria Marco, professor of political history Madrid's Comillas university.

The outcome could also make it hard for Zapatero to impose further austerity measures if needed to cut the budget deficit as Spain strives not to be pulled into the euro zone debt crisis that has already swallowed up Greece, Ireland and Portugal.

"The panorama does not transmit tranquillity to foreign investors... the difficulty to take economic decisions is accentuated," said Emilio Ontiveros, president of International Financial Analysts consulting firm.

Investors will be watching closely in the coming weeks to see whether big budget gaps are revealed in local governments, now that the political campaigning is over.

Fiscal problems at the regional level would spook markets that are scrutinizing Spain to see if it can meet commitments to cut the central deficit to 6 percent of Gross Domestic Product this year.

(Additional reporting by Jesus Aguado, Manuel Maria Ruiz and Judy MacInnes; Editing by Matthew Jones)

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