Spain PM pleads for political, fiscal union in Europe

Saying Spain's business, banks and regional governments were struggling to finance themselves at current high borrowing costs, he urged Europe to integrate its banking system more closely, although he did not go into details.

"Europe has to transmit to the world that the euro is an irreversible project," he told members of his Partido Popular party at an event in San Sebastian, northern Spain.

"...Europe needs more political integration, Europe needs more fiscal integration and Europe needs more banking integration."

Spain secured a 100 billion euro ($126 billion) rescue last weekend from Europe for its troubled banks, struggling with losses from a decade-long debt binge linked to a burst property bubble.

But the country's financing costs have continued to rise, bringing it closer to joining Greece in needing a full-scale bailout.

The yield on Spain's 10-year bond topped 7 percent on Thursday, a danger level that triggered international aid deals for Greece as well as Ireland and Portugal.

Rajoy said Spain needed to continue to reduce its fiscal deficit.

"We cannot live beyond our means on a permanent basis," he said. "We cannot have double the number of airports as Germany, for example."

But he told reporters on the sidelines of the event that a rise in sales tax, as recommended by the International Monetary Fund in a report on Friday, was not in his current plans.

Spain intends to raise its value added tax (VAT) rate in 2013. The country has one of the lowest VAT rates in Europe, even after hikes in 2010. The government is concerned tax rises will hurt economic growth.

The euro zone could find itself scrambling to prevent a break-up if a radical left-wing party wins Sunday's vote in Greece. Rajoy said he was convinced Greece would stick to its commitments and stay in the euro.

($1 = 0.7921 euros)

(Reporting By Sonya Dowsett; Editing by John Stonestreet)