Spain's central bank on Monday forecast that the country, which is struggling to slash its deficit and debt, will fall back into recession this year with a contraction of 1.5 percent.
The Bank of Spain said however it expects Spain's economy to make a modest rebound in 2013 with growth in gross domestic product (GDP) of 0.2 percent.
It added that it estimates the economy to have grown by 0.7 percent in 2011.
"In 2011 the modest recovery which the Spanish economy began a year earlier weakened as the eurozone sovereign debt crisis extended to a greater number of countries and financial market tensions strengthened," it said in a report.
The return to recession will make it harder for Spain, the eurozone's fourth largest economy, to meet its goal of slashing the public deficit to 4.4 percent of output.
Spain's new government announced shortly after it was sworn in last month that the public deficit last year would come in at around 8.0 percent of GDP, way above the 6.0-percent target agreed with Brussels by the previous Socialist government.
It has announced spending cuts of 8.9 billion euros ($11.5 billion), and tax increases to bring in 6.3 billion euros, to reduce the deficit and make sure the country does not get dragged into the debt crisis mire that has already forced Greece, Ireland and Portugal to seek financial bailouts.
Spain emerged only at the start of 2010 from an 18-month recession, triggered by the global financial crisis and a property bubble collapse, which led the jobless rate to balloon to 21.5 percent, the highest level in the industrial world.