* Spain Q1 GDP -2.9 pct yr/yr, -1.8 pct qtr/qtr-estimate
* Worst results since World War Two, say economists
* Rate of decline may level off after Q1
(Adds analyst comment, context)
By Andrew Hay
MADRID, April 29 (Reuters) - Spain suffered its worst economic contraction since the Second World War in early 2009 as the global crisis and a construction collapse sent unemployment soaring, Bank of Spain data showed on Wednesday.
Spanish gross domestic product fell 2.9 percent year on year in the first quarter and 1.8 percent on a quarterly basis as unemployment hit 17.4 percent, by far the highest rate in the European Union, the central bank said in its monthly bulletin.
The forecasts were in line with private sector estimates and economists said the first quarter could mark the worst moment of Spain's recession, which is expected to drag into next year.
"We've touched bottom, in the sense we've reached the worst rates of contraction," said Angel Laborda at Spain's FUNCAS, a consultancy run by savings banks.
Spain's economic problems spread from its troubled construction sector into service industries during the first quarter amid prolonged turmoil in global financial markets, the Bank of Spain said.
"The first months of 2009 showed an intensification of the recessionary trend seen at the end of 2008," the bank said.
NO DEFLATION
The estimated contraction in first quarter year-on-year GDP was over four times larger than a 0.7 percent decline in fourth quarter growth. The quarterly fall compared with a 1 percent contraction in the last three months of 2008.
Domestic demand fell 4.9 percent year-on-year, and the first quarter result would have been even worse if not compensated for by a steep fall in imports which reduced the negative effect on GDP of Spain's trade deficit.
The Bank of Spain does not expect the economy to return to growth until late 2010 as it grapples with the twin shocks of the global financial crisis and the collapse of its decade-long house building and real estate boom.
The International Monetary Fund last week forecast it would take until 2014 for Spanish GDP to return to 2 percent growth, a rate at which the economy creates jobs and runs a budget surplus.
Spain's central bank, together with the IMF and most economists, recommend Spain take advantage of the crisis to embark on sweeping structural reforms to boost low productivity and reduce dependence on millions of low-skilled jobs.
Thus far, Spanish Prime Minister Jose Luis Rodriguez Zapatero has said now is not the time for an economic overhaul and Spain must instead focus on public spending projects to revive the economy.
The public sector budget deficit will near 9 percent of GDP in 2010, three times the EU limit, and the government has limited room for additional fiscal stimulus, the bank said.
Spain's deep recession led to its first negative inflation since 1952 in March, and while the bank saw this trend continuing in coming months, it did not see long-term deflation.
The fall in Spain's consumer price index is being driven by comparatively higher oil prices in the first half of 2008, the central bank said.
"You can't conclude from this that the Spanish economy is going to enter a situation of generalised price falls nor the next step is to enter a deflationary spiral," the bank said.
(Reporting by Andrew Hay and Manuel Maria Ruiz; Editing by Stephen Nisbet)