UPDATE 7-Spanish PM acts to strengthen govt with reshuffle

* Broadest cabinet changes since government came to power

* Heavyweight Rubalcaba new deputy prime minister

* Economy ministry unchanged (Adds analyst comment, updates bond spreads)

By Sonya Dowsett

MADRID, Oct 20 (Reuters) - Spain's Prime Minister Jose Luis Rodriguez Zapatero overhauled his cabinet on Wednesday, aiming to strengthen his unpopular government while battling to tame a massive public deficit and revive a stagnant economy.

Interior Minister Alfredo Perez Rubalcaba, who has a high approval rating and is seen by some as a successor to Zapatero, becomes deputy prime minister in the biggest reshuffle since the Socialists came to power in 2004.

"It's time for another kind of political action, a different direction and drive from the government," Zapatero said in a speech announcing five new ministers on top of Rubalcaba assuming the extra role, and the closure of two ministries.

Spaniards suffering tax increases, salary reductions and the highest unemployment rate in the euro zone have punished the government, whose approval ratings have sunk below 30 percent.

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Zapatero recently wrapped up deals with two minority parties to pass a 2011 budget with deep spending cuts, aimed at assuring investors that Spain can trim its deficit which ballooned out of control after stimulus measures to stave off recession.

If he had not found the votes he could have faced an early election, which polls show he would lose by almost 15 percentage points to the centre-right Popular Party. His term ends in 2012.

HEIR APPARENT

Socialist party veteran Rubalcaba, nine years older than the 50-year-old prime minister, heads the government campaign against Basque separatist group ETA which has weakened the armed rebels with a string of arrests of the group's leaders.

"He's the heir apparent," said Pedro Schwartz, an economist at San Pablo University in Madrid. "He's intelligent and efficient and he does reinforce the government."

Zapatero made no changes at the Economy Ministry, run by Elena Salgado, who implemented the tough austerity measures brought in after investors punished Spain's sovereign debt on concerns the country was moving toward a Greek-style bailout.

Any changes in the Economy Ministry at this time could create uncertainty and spook financial markets, analysts said.

The 2011 budget cuts spending and increases taxes to shrink one of the euro zone's largest public deficits to 6 percent of gross domestic product next year from 11 percent.

The government has stuck with its austerity plan even while recognising that spending cuts will make it hard for economic recovery to take off.

The economy is expected to grow only 0.4 percent next year, according to experts surveyed by Reuters [ID:nLDE69620Z], well below the official forecast of 1.3 percent.

Although spending cuts have hurt the government's popularity at home, they have boosted confidence among investors who now view Spain as less risky than peripheral euro zone economies such as Portugal and Ireland.

Spain's 10-year bono ES10YT=TWEB spread over the equivalent German bund DE10YT=TWEB widened around 6 basis points on Wednesday ahead of the reshuffle before shrinking back to around 163 bps, less than half that of Ireland.

In other changes, Trinidad Jimenez will be Spain's new foreign minister, leaving her post as health minister. Labour Minister Celestino Corbacho will step down, as expected, to be replaced by economist Valeriano Gomez.

Zapatero dissolved the ministries of equality and housing as part of cost cuts. (Additional reporting by Fiona Ortiz and Paul Day, Editing by Janet Lawrence)