UPDATE 5-Spain's King Juan Carlos abdicates to revive monarchy
* King to step down for political reasons - royal source
* Announcement was delayed until after European elections
* Once-popular king lost public support in recent years
* Prince Felipe held in greater public esteem (Adds demonstrations across the country)
By Rodrigo De Miguel and Elisabeth O'Leary
MADRID, June 2 (Reuters) - Spain's King Juan Carlos said on Monday he would abdicate in favour of his son Prince Felipe, aiming to revive the scandal-hit monarchy at a time of economic hardship and growing discontent with the wider political elite.
"A new generation is quite rightly demanding to take the lead role," Juan Carlos, 76, said on television, hours after a surprise announcement from Prime Minister Mariano Rajoy that the monarch would step down after almost 40 years on the throne.
The once-popular monarch, who helped to smooth Spain's transition to democracy in the 1970s after the Francisco Franco dictatorship, seemed increasingly out of touch in recent years.
He took a secret luxury elephant-hunting trip to Botswana in 2012, at a time when one in four Spanish workers was jobless and the government teetered on the brink of a debt default.
A corruption scandal in the family and his visible infirmity have also eroded public support. Polls show greater support for the low-key Felipe, 46, who has not been tarnished by the corruption allegations.
The king's younger daughter, Princess Cristina, and her husband, Inaki Urdangarin, are both under investigation and a judge is expected to decide soon whether to put Urdangarin on trial on charges of embezzling 6 million euros in public funds through his charity. He and Cristina deny wrongdoing.
Rajoy said the king, who walks with a cane after multiple hip operations and struggled to speak clearly during an important speech earlier this year, was stepping down for personal reasons.
But a source at the royal palace told Reuters that political factors had driven the decision. The source said the king had decided in January to step down, but delayed the announcement until after the European Union election on May 25.
Political analysts said the ruling conservative People's Party (PP) was eager to put the more popular Felipe on the throne to try to combat increasing anti-monarchist sentiment; small leftist and anti-establishment parties did surprisingly well in the election.
Spain is only just pulling out of a long recession that has dented faith in politicians and state institutions as well as the royal family. The PP and the Socialists, which have dominated politics since the return to democracy, are committed to the monarchy, but polled less than 50 percent between them.
The smaller leftist parties Podemos and United Left and the green party Equo, which together took 20 percent in the European vote, all called on Monday for a referendum on the monarchy.
"People are calling for political regeneration, a change in the institutional functioning of the state after around 40 years of democracy, and they've started with the royals," said Jordi Rodriguez Virgili, professor of political communication at Navarra University.
Thousands demonstrated on Monday night across Spain's main cities to demand a plebiscite.
"I came here because I believe we should at least vote in a referendum. Three out of four Spaniards have not decided to have this (political) system, so I think it would be fair," said Hector Munoz, a 25-year-old student demonstrating in Madrid's Puerta del Sol square.
Spain does not have a law that precisely regulates abdication and succession. Rajoy's cabinet was due to hold an extraordinary meeting on Tuesday to set out the steps for the crown prince to take over as King Felipe VI. The transition will probably be accomplished by passing a law through parliament, where the PP has an absolute majority.
NEED FOR CHANGE
"We've been hearing continuously over the last few months about the necessity for deep change. The feeling is that the European elections have been a turning point and I believe the decision has been made in this context," said Rafael Rubio, constitutional expert at Madrid's Complutense University.
A survey in January by Sigma Dos found 62 percent of Spaniards in favour of the king stepping down, compared with just 45 percent a year earlier. Only 41 percent had a 'good' or 'very good' opinion of the king.
Felipe, by contrast, has a 66 percent approval rating and the poll indicated that most Spaniards believed the monarchy could recover its prestige if he ascended the throne.
"Felipe has a lot more energy to do the job," said 36-year-old student Alfonso Romero.
Political analysts speculated that Felipe may try to promote dialogue between Rajoy and Catalan President Artur Mas, who is leading a movement to break away from Spain. Mas said on Monday that Felipe's succession would not dissuade him from trying to hold a referendum on independence for Catalonia in November.
The prince, who has had a growing role in ceremonial events in the past year, is seen as more practical and in tune with current affairs than Juan Carlos, a jovial skier and sailor once beloved for his common touch and seen as much more accessible than the older generations of British royals.
Juan Carlos will be the third European monarch to abdicate in just over a year. Albert of Belgium left the throne to his son Philippe on July 2013 and Queen Beatrix of the Netherlands stepped down in April 2013 to make way for her son Willem-Alexander.
Felipe married divorced journalist Letizia Ortiz in 2004 and they have two daughters. The royal family began a Twitter feed (@CasaReal) on their 10th wedding anniversary, May 21, with tweets on both Juan Carlos and Felipe's weekend visit to El Salvador for the swearing in of President Salvador Sanchez Ceren.
The prince was in Spain on Monday but had no official events planned until Tuesday, when he is scheduled to appear with the king at the El Escorial monastery and former royal palace. (Additional reporting by Daniel Ruiz, Tracy Rucinski, Sarah Morris, Paul Day and Blanca Rodriguez in Madrid, Andres Gonzalez in Toledo, and Alison Williams in Paris; writing by Fiona Ortiz and Julien Toyer; editing by Philippa Fletcher and Kevin Liffey)
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