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Bank of Spain says GDP fell 3.6 pct in 2009

* Q4 GDP -0.1 pct q/q, -3.1 pct y/y

* GDP fell 3.6 pct in 2009, worst in decades

MADRID, Feb 5 (Reuters) - Spain’s economy contracted by 3.6 percent in 2009, the most in decades, as domestic demand crumpled, according to a Bank of Spain estimate on Friday that was in line with government forecasts.

But the rate of decline in gross domestic product eased in the final quarter to 0.1 percent, in quarterly terms, the Bank of Spain said in a report.

This compared to a decline of 0.3 percent in the third quarter.

The estimates came ahead of preliminary government GDP data for the fourth quarter due on Feb. 11. The Bank of Spain’s estimate is usually very close to or the same as the official data.

The fall in GDP was softened by a decline in Spain’s huge current account deficit, as the easy credit which fed a decade-long property boom evaporated, the Bank said.

“GDP declined 3.6 percent during 2009, the biggest fall in recent decades and in line with the severe contractionary tendencies affecting the world economy in recent quarters, although in Spain’s case the imbalances accumulated during the preceding expansive phase also contributed to the decline in activity,” the Bank said.

Records provided by the government’s Institute of Statistics, which only go back until 1971, showed the previous worse contraction as 1.1 percent in 1993. In 2008, the economy had grown by 0.9 percent.

Spain is now paying the price for years of running inflation higher than the euro zone average and accumulating high levels of private sector debt.

With unemployment closing in on 20 percent, some investors are beginning to fear the country will struggle to cut a budget deficit which reached 11.4 percent of GDP in 2009.

The spread on Spanish 10-year treasury bonds ES10YT=RR over benchmark German bunds hit 100 basis points on Friday, as nerves rose over periphery euro zone countries, especially Greece.

The Bank of Spain said that it was vital for the government to reform the pension system and the labour market, and that Spanish inflation needed to remain lower than the euro zone average in order for the country to regain competitiveness. (Reporting by Jason Webb)