The Spanish government has unveiled another round of tax increases and budget cuts as it tries to avoid a full-blown bailout.
Spanish 10-year bond yields fell as the 2013 budget was announced by deputy Prime Minister Soraya Saenz de Santamaria, who insisted the axe would be accompanied by 43 new laws to restructure the economy to help boost growth and competiveness.
The country's embattled government said the economic reforms were based on spending cuts rather than large tax increases, and predicted a 'soft' recession in 2013 with employment levels starting to rise.
The cuts total 40bn euros (£32bn), with government departments seeing their budgets hacked by an average of 8.9%, while overall budget spending will increase by 5.6%.
A popular tax break for home buyers will end and industrial polluters will be charged for the amount of carbon dioxide they emit.
The government is setting up an independent fiscal authority to monitor state finances, and promised to raid a special fund to ensure pensions rise by 1% next year. The retirement age will not be raised, as had been predicted.
Finance minister Luis de Guindos said the budget followed EU recommendations, suggesting that if the country has to appeal for extra funds from international creditors, the terms will not be too severe.
The budget aims to avoid the political humiliation of having Brussels impose conditions on any request for an international bailout.
It is the fifth programme of belt-tightening by the Conservative government led by Mariano Rajoy since his election nine months ago.
The country is struggling with high debt, while the economy is contracting and nearly half of all young people are out of work.
The government is trying to reduce its budget deficit this year to 6.3% of gross domestic product, but revenue is shrinking as cuts begin to bite, so analysts expect the Eurozone's fourth largest economy to miss that target.
However, Spain's treasury minister Cristobal Montoro said it would be easy to meet, thanks to a 'solid' revenue performance.
Presenting the budget for the year ahead, Mr Montoro said that tax revenue would grow by 3.8% in 2013 compared with this year.
The FTSE 100 closed 0.2% up as Spain's Ibex dropped by 0.15% after the budget announcement.
The 10-year bond yield dropped to 5.977%, down 11 basis points, unwinding part of a steep rise seen on Wednesday.
Traders had closed out their bets ahead of the budget to protect against a possible further sell-off.
Spain's financial woes started with the collapse of the housing industry which left the country's banks with billions of euros in loans which borrowers were unable to pay back.
That has left the banking system short of cash, so lending between institutions, as well as to businesses and individuals, has virtually dried up.
The situation has been made worse by a global recession linked to the crisis in the Eurozone and financial shortfalls in Spain's 17 regional governments, which have appealed to the national government for bailout cash.
All of these problems have made it much more expensive for the Spanish government to raise money on the bond markets, forcing a promised intervention by the European Central Bank to reduce borrowing costs.
But that programme can only begin when Prime Minister Rajoy formally asks for help, which would be politically humiliating and force Spain into more austerity and structural changes demanded by international creditors.
The cuts come after days of street protests and arrests in the capital Madrid.
Spaniards have protested against both slashed welfare conditions and high unemployment following a property bubble burst and banking collapse.
Meanwhile some investors have voiced concern of Spain's ability to soldier on without eurozone help.
"(There is) some speculation Rajoy may ask for a bailout over the weekend," one trader said.
On Friday, the results of stress tests on 14 banking groups in Spain will be released and is expected to show they need over 60bn euros (£48bn) to restore the system to health, more than had originally been expected.
