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MADRID (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 the new 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 cabinet changes on top of Rubalcaba assuming the extra role, and the closure of two ministries.
Spaniards suffering budget cutbacks, salary reductions and the highest unemployment rate in the euro zone have punished the government, whose approval ratings have sunk below 30 percent.
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 a grim recession.
If he had not found the votes he could have faced early elections, which polls show he would lose by almost 15 percentage points to the center-right Popular Party. His term is scheduled to end in 2012.
Rubalcaba heads the government campaign against Basque separatist group ETA, which is widely seen as successful due to 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 difficult time could create uncertainty and spook financial markets, said Luis Miguel Doncel, economy professor at the Rey Juan Carlos University in Madrid.
The 2011 budget slashes ministry spending and includes tax increases to reduce one of the euro zone's largest public deficits to 6 percent of gross domestic product next year from 11 percent last year.
The government has stuck with its austerity plan even while recognizing 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 spread over the equivalent German bund -- a key indicator of investment risk -- widened to around 170 basis points from 164 basis points on Wednesday before shrinking back to around 162 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. Outgoing Foreign Minister Miguel Angel Moratinos is respected in European and Middle Eastern diplomatic circles, but has weak ratings at home.
As expected, Zapatero replaced his labor minister, Celestino Corbacho.
Corbacho said after pushing through labor market reforms which have angered unions that he would step down to return to local politics in his home region of Catalonia. The replacement is economist Valeriano Gomez.
Zapatero also said he was dissolving the ministries of equality and housing as part of cost cuts.
(Additional reporting by Fiona Ortiz and Paul Day)
Editing by Diana Abdallah/David Stamp