Spain's victorious Socialists turn to economy

(Edits, adds background, paragraphs 10-13)

MADRID, March 10 (Reuters) - Fresh from a second consecutive election victory, Spain's Socialists began to prepare a public works programme on Monday to reinvigorate a flagging economy.

Prime Minister Jose Luis Rodriguez Zapatero, who boosted his tally of parliamentary seats but once again fell short of an absolute majority, said he would approach smaller parties to forge alliances.

"There are a number of parties we can speak to," an exhausted-looking Zapatero told a news conference.

"Obviously we're going to be talking to all of them," he said, without specifying whether he would be seeking a permanent alliance or simply continue as he has over the past four years, with different deals for different legislation.

The Socialists gained five seats for a total of 169 in the 350-seat parliament. The opposition conservative Popular Party (PP) also gained five seats to reach 153, while smaller left-wing parties and some nationalist parties lost ground.

Sunday's turnout was a high 75 percent, in an election overshadowed by the assassination of a former Socialist councillor in the Basque Country, blamed on ETA rebels.

Participation almost matched that of 2004, when voters galvanised by the PP government's mishandling of an Islamist attack on Madrid trains handed the Socialists a surprise win.

Zapatero on Sunday promised to govern for the poor, women and the young, continuing the progressive note of his first term, during which he legalised gay marriage and made divorce easier in the once deeply Roman Catholic country.


But with Spain's long economic boom slowing sharply since the global credit crunch bit late last year, his first priority will be to put the lid on unemployment, which rose by 50,000 in February alone to 2.3 million.

In an interview on Monday on television channel Telecinco, Zapatero was asked about sharp increases in unemployment among immigrants from the construction sector, and he said he was talking to companies and trade unions about joblessness.

Building firms are shedding jobs at the end of a decade-long housing boom and high numbers of immigrants work in the sector.

"We are working on a specific plan for people who lose jobs in the construction sector," Zapatero said, without giving details.

The government has said in the past that it expects other sectors of the economy to expand and absorb workers laid off from the construction sector.

Earlier, Labour Minister Jesus Caldera said Spain's budget surplus would allow it to fund public works programmes.

"They know they have to do something quickly ... The dark clouds have gathered, the question is how hard it will rain," said Martin Van Vliet, chief economist at ING Amsterdam.

The government hopes increased spending will keep economic growth at 3 percent after 3.8 percent expansion last year, but some private economists, worried by high levels of debt in both households and firms, fear it could fall as low as 2 percent.

Analysts also point to the long-term economic problems of a country that for years has relied on the construction boom and ballooning private sector debt for growth.

The private debt load is reflected by a current account deficit running at nearly 10 percent of gross domestic product.

Economists say Spain badly needs to make its exports more attractive and encourage inward investment in sectors other than property, notably by improving productivity as well as infrastructure and education.

"They're all focused on giving the economy a boost, a much needed boost, but it shifts focus away from reforms in the context of a huge current account deficit. It's a worrying longer term risk," said Van Vliet.

The Barcelona newspaper La Vanguardia reported that Socialist officials had already met representatives of the moderate Catalan nationalist party Convergencia i Unio to talk about a possible deal. CiU, which won 11 seats, declined to comment.

CiU would almost certainly want a bigger share of tax revenues for the wealthy Catalonia region.

"They (the Socialists) are seven seats away from an absolute majority. They can pick and choose their allies on an ad hoc basis," said Charles Powell, of San Pablo-CEU University.

In the last parliament, Zapatero often relied on United Left and the left-wing Catalan nationalists Esquerra Republicana, who were punished at the polls this time. (Additional reporting by Andrew Hay and Sarah Morris; Editing by Kevin Liffey)