Spain's economy wilted in the third quarter of 2012, official data showed on Tuesday, as the government's austerity programme choked consumer spending in a deep recession.
A slide in domestic demand, driven by a 25-percent jobless rate, overwhelmed a slight improvement in the trade balance, according to preliminary figures from the National Statistics Institute.
Gross domestic product dropped by a quarterly rate of 0.3 percent, marginally better than the previous quarter's 0.4-percent decline, the report showed.
But when compared with output a year ago, the economy slumped 1.6 percent in the third quarter -- the sharpest annual decline since the end of 2009 during the previous recession provoked by a 2008 property crash.
The eurozone's fourth-largest economy is hovering on the edge of a sovereign bailout, after already securing a eurozone rescue loan of up to 100 billion euros ($129 billion) for its banks.
Prime Minister Mariano Rajoy said this week that the government had not made a widely anticipated formal request for eurozone aid because it was "not essential".
Spain's 10-year bond rates rose above 7.0 percent in mid-summer but borrowing costs tumbled after the European Central Bank outlined plans in September to buy an unlimited amount of Spanish bonds.
The drop in borrowing costs has given Madrid some breathing space although Spanish 10-year bond yields remained relatively high at 5.65 percent.
But Madrid is hesitating formally to ask for a eurozone bailout with ECB aid, which would mean submitting to strict economic conditions and international supervision.
In the meantime, it is battling to slash its heavy public deficit alone, launching a programme to squeeze out 150 billion euros in savings between 2012 and 2014, including 39 billion euros in 2013.
That same austerity programme, however, acts like a brake on domestic economic activity.
The Bank of Spain warned recently that the efforts to clean up the budget deficit had a "clear impact" on the mid-year slump.
The central bank last week said the performance might have been even worse in the third quarter but for a government announcement that it would raise sales tax from September 1.
The impending sales-tax rise prodded many people to go out and buy durable consumer goods such as washing machines and televisions in July and August before the price went up.
Retail sales fell by nearly 11 percent in September, the sharpest monthly fall since records began in 2003, the INE figures showed.
"This big fall was caused in part by purchases being brought forward a month due to the effect of the sales tax rise," wrote analysts at investment group Renta 4.
Analysts at Spanish brokerage Link Securities wrote: "The entry into force of the sales tax rise has significantly influenced consumers' behaviour."
The sales tax rise also sent consumer prices up by 3.5 percent in the year to October, the Spanish statistician said in a release of preliminary data.
That inflation rate, unchanged from September, will increase the cost of the government's obligation to raise pensions in line with inflation in November.
Despite the negative growth forecast, the Madrid stock market rose on Tuesday, closing 1.36 percent higher at 7,833.9 points.