* Repsol shares fall, Spain warns of economic reprisals * Argentine official says "the state is the solution." * Repsol declares the "Battle is not over;" Argentina balks at price * Moody's downgrades YPF, ratings remain on review By Tracy Rucinski and Julien Toyer MADRID, April 17 An incensed Spain threatened swift economic retaliation against Argentina on Tuesday after it unveiled plans to seize YPF, the South American nation's biggest oil company which is controlled by Spanish energy group Repsol. Madrid called in Argentina's ambassador over the nationalization order on Monday by Argentina's combative president, Cristina Fernandez, a move that sent Repsol shares tumbling but delighted many ordinary Argentines. "I must express my profound unease. It's a negative decision for everyone," Spanish Prime Minister Mariano Rajoy said. Speaking at a World Economic Forum meeting in Mexico, he said the Spanish-controlled company was being expropriated "without any justification." Spanish Industry Minister Jose Manuel Soria promised "consequences" in the coming days. "They will be in the diplomatic field, the industrial field, and on energy," he said. Spain is due to consider its next steps at a cabinet meeting on Friday. But it appeared to have limited leverage over Argentina, which has proven impervious to pressure in the past. Repsol said YPF was worth $18 billion as a whole, and that it would seek compensation on that basis. As of Tuesday's market close, YPF's market capitalization was $10.4 billion, according to Reuters data. Argentina's Deputy Economy Minister Axel Kicillof said Buenos Aires would not agree to Repsol's valuation. " W e're not going to pay what they say," he told the Senate committee kicking off a debate over the expropriation bill. "We need YPF's objectives to match Argentina's objectives ... The state is the solution," Kicillof said. He said that securing control of YPF was central to Fernandez fulfilling her reelection campaign promise of "deepening the model" for her state-centric policies. A surging fuel import bill has pushed production to the top of Fernandez's agenda at a time of worsening state finances in Latin America's No. 3 economy. Repsol, whose shares fell 7.5 percent in Madrid on Tuesday, said the takeover was unjustified and vowed to defend its interests. "This battle is not over," company Chairman Antonio Brufau said. "The expropriation is nothing more than a way of covering over the social and economic crisis facing Argentina right now." Late on Tuesday, Moody's Investors Service said it was downgrading YPF and keeping the company's ratings on review. European Commission President Jose Manuel Barroso urged Argentina to uphold international agreements on business protection with Spain. "I am seriously disappointed about yesterday's announcement," he said in Brussels. British Foreign Secretary William Hague added to the chorus of condemnation, saying: "This goes against all the commitments Argentina has made in the G20 to promote transparency and reduce protectionism." Argentina and Britain have been locked in a diplomatic battle over oil exploration in the Falkland Islands for months. RESOURCE NATIONALISM Spanish media slammed the expropriation, believed to be biggest nationalization in the natural resources field since the seizure of Russia's Yukos oil company a decade ago. La Razon newspaper carried a photograph of Fernandez on its front page in a pool of oil with the headline: "Kirchner's Dirty War", a reference to her full name. El Periodico spoke of "The New Evita", noting Fernandez announced the nationalization in a room dominated by a large sculptured image of Eva Peron, the first lady of Argentina from 1946-1952 who is revered by many Argentines as a champion of the poor. Repsol's Brufau said he suspected nationalization of YPF was imminent when he tried to contact Fernandez last Friday and was told that the president "was angry" and did not want to speak. YPF has been under pressure from Fernandez's center-left government to boost oil production, and its share price has plunged in recent months on speculation about a state takeover. Spanish investment in Argentina may now be at risk after the move on YPF. In the "reconquista", or reconquest, of the 1990s, newly privatized Spanish businesses bought Latin American banks, telephone companies and utilities. "Reconquista" refers to the Spanish conquest of the region 500 years earlier. Foreign investors are key to helping develop one of the world's largest reserves of shale oil and gas recently discovered in the Vaca Muerta area of Argentina. Investors have pushed up the cost of protecting themselves against the risk of Argentina defaulting on its debt. Since February, Argentine credit default swaps have cost more than those of Venezuela, whose credit is also considered risky. Argentine bond spreads widened to almost three times the average of the JPMorgan Emerging Markets Bond Index Plus (EMBI+) , showing a decline in confidence. ACE UP ITS SLEEVE? Some analysts questioned whether Argentina might have an ace up its sleeve in the form of a new partner such as China Petrochemical Corp (Sinopec Group). A Chinese website said Sinopec was in talks with Repsol to buy YPF for more than $15 billion, although other sources said the nationalization move would probably get in the way of such a deal. Sinopec dismissed the report as a rumor. Fernandez said on Monday the government would ask Congress, which she controls, to approve a bill to expropriate a controlling 51 percent stake in YPF by seizing shares held exclusively by Repsol, saying energy was a "vital resource". Fernandez, who still wears the black of mourning 18 months after the death of her husband and predecessor as president Nestor Kirchner, stunned investors in 2008 when she nationalized private pension funds. She has also renationalized the country's flagship airline, Aerolineas Argentinas. Such measures are popular with ordinary Argentines, many of whom blame free-market policies such as the privatizations of the 1990s for the economic crisis and debt default of 2001/02.