Spanish Socialists win short of overall majority

"I will govern for all people, thinking first of those who have nothing," Prime Minister Jose Luis Rodriguez Zapatero told thousands of supporters cheering and waving red flags outside the Socialist headquarters.

With 96 percent of votes counted, the Socialists were projected to win 169 seats in the 350-seat lower house, up five from the previous legislature. The conservative Popular Party (PP) won 153 seats, also up five from 2004, when voters turned against them after they rushed to blame the Basque separatists of ETA for election-eve train bombings that turned out to be the work of Islamists.

The night's big losers were small left-wing parties. "We're the political party that gained more seats than any other in Spain, in votes and in percentage," PP leader Mariano Rajoy told supporters. The economic slowdown and a sharp rise in unemployment dominated the election campaign until Friday, when a former Socialist councilor was shot at point-blank range in the Basque Country. Both main parties blamed ETA.

Zapatero, 47, started his victory speech remembering the five deaths attributed to ETA since it ended a ceasefire in December 2006 after he had made peace overtures. "We feel the absence of all victims of terrorism. They live on in our memory," said Zapatero, who has ruled out negotiating with ETA in his second term. Zapatero has won popularity with liberals around Europe over the last four years by pushing through social policies such as legalizing gay marriage. But his next term will pitted with more serious problems as Spain's economic boom comes to a sudden end.

In the last nine months, 300,000 people have joined the jobless queues, most of them from the construction sector. Several analysts have cut their 2008 growth forecasts to about 2 percent after 3.8 percent growth last year and some worry that things could get worse if property companies start defaulting on their huge piles of debt.

SMALL PARTY POWER

How quickly and firmly Zapatero can deal with the slowdown will depend on what alliances he strikes with smaller parties, which often demand regional policies that rile the rest of Spain in exchange for their support.

Political analysts expected the Socialists to do a deal with the Catalan party Convergencia i Unio (CiU), which has sided with Zapatero's minority government in many votes over the last four years. CiU was projected to win 10 seats on Sunday.

"What I expect now is an emergency fiscal package which is probably going to be announced very soon," said Gilles Moec, an economist at Bank of America. "Of course, the fact that the Socialists are not apparently going to have an absolute majority probably makes it a little bit complicated", he added.

Nicolas Lopez, an analyst at Spanish brokerage M&G, said the election result was not a surprise and that the stock market would now look to see what steps the new government would take to mitigate the economic slowdown, and when.