* Q3 unemployment unchanged from Q2 at 17.9 percent
* Number of unemployed fell 14,100 to 4.1 million
* Workforce participation rate slips
(Adds details, reaction)
By Jason Webb
MADRID, Oct 23 (Reuters) - Spanish unemployment was unchanged at a better-than-expected 17.9 percent in the third quarter, but analysts said a fall in the number of people looking for work disguised continuing job destruction.
The number of unemployed workers totalled 4.1 million in the third quarter, down by 14,100 from the second quarter when the rate had also been 17.9 percent, the National Statistics Institute said.
Spain's unemployment rate is the highest in Europe, as it pays the price for a decade-long boom during which most of its growth was based on adding low-productivity labour in the construction and services sectors.
"We expected a much higher rate," said Estefania Ponte of BNP Paribas. But she added: "The number of people seeking work has fallen, and that's made the headline figure look a bit better."
The number of people with jobs fell by 7.3 percent from a year earlier, she pointed out.
"A lot of employment is still being destroyed in Spain, which doesn't give you a very good base going forward," she said.
Economists surveyed by Reuters had forecast unemployment
would rise to 18.6 percent in the third quarter
With Spain's economy expected by economists to contract by roughly 4 percent this year and to continue to decline in the early parts of 2010, the government has forecast unemployment will rise to a maximum 18.9 percent.
Things would be considerably worse if it were not for massive government spending, centred on a public works programme which has torn up streets all over Spain and is set to push the budget deficit to close to 10 percent of gross domestic product this year.
Many private economists are more pessimistic than Socialist Prime Minister Jose Luis Rodriguez Zapatero and expect Spain's relatively uncompetitive labour force will continue to contract as the economy suffers the hangover from a decade-long private sector debt and property binge.
"We expect unemployment will continue to rise in the fourth quarter and that we'll hit 20 percent in 2009," said Jose Luis Martinez, of Citigroup.
The workforce participation rate slipped to 59.8 percent, down a quarter of a percentage point from the previous quarter.
Particularly hard hit have been immigrants, whose unemployment rate was 27.5 percent compared to 16.1 percent for Spaniards.
Economists point out that while Spain's official employment rate is terrible, many supposedly unemployed workers are surviving in the burgeoning black economy. Unions say this has been a key factor in avoiding social unrest. (Additional reporting by Krista Hughes, Damian Wroclavsky and Manuel Maria Ruiz)