(Adds new FUNCAS consensus forecast, EU estimates)
By Andrew Hay
MADRID, Feb 5 (Reuters) - Spanish industrial production fell by almost a fifth during December, the largest decline on record, and data showed debt defaults soaring as the global crisis tipped Spain into deep recession.
The 19.6 percent slump in output at Spain's credit-starved factories and businesses dwarfed slowdowns in other major European economies. A separate data release on Thursday from the National Statistics Institute showed 1,082 Spanish firms filed for bankruptcy protection between October and December, almost four times as many as in the same period of 2007.
Companies were hit by a collapse in demand after unemployment rose to 14.4 percent in December, twice the average in the 27-member European Union, according to EU data.
This prompted the opposition Popular Party to say Spain faces a "social tragedy" and "national emergency."
Analysts described Thursday's numbers as "horrendous" and "incredible" and saw Spain suffering more than any other major European economy as the global credit crisis coincided with the collapse of its house building and real estate boom.
But, with the Bank of Spain forecasting a 1.1 percent quarter-on-quarter decline in fourth quarter gross domestic product, the steepest in over 50 years, some analysts said Spain could be reaching the worst part of its crisis.
"A lot of people think the first quarter will be the low point, and there will be some bottoming out," said Jose Garcia Zarate at the 4Cast consultancy.
Others saw the economy in freefall.
"The rate of decline is very worrying and there is no sign of its slowing," said Diego Fernandez at Fortisbank.
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Economy Minister Pedro Solbes last month said Spain faced its worst recession in 50 years in 2009 with gross domestic product contracting 1.6 percent before a recovery to 1.2 percent expansion in 2010.
The European Commission expects the economy to shrink 2 percent this year and 0.2 percent the next as unemployment rises to 18.7 percent in 2010.
Spanish banks expect growth to fall 1.8 percent in 2009, according to a consensus forecast released by the FUNCAS consultancy on Thursday.
Hardest hit in the crisis are Spain's small and medium sized businesses, which employ about 80 percent of the workforce.
Firms complain they had little warning of the crisis from Spain's Socialist government, which ruled out a recession until October, when it launched plans to create over 300,000 jobs from March with 32,000 municipal public works projects.
"The government struggled to accept there was a crisis, and was late providing solutions, so we've lost precious time," said Jesus Barcenas, President of Cepyme, Spain's largest SME group.
Companies are being forced to file for bankruptcy due to cash flow problems as consumers put spending on hold and liquidity starved banks refuse to roll over loans, he said.
Bankruptcy data showed the consequences of Spain's long over dependence on construction, real estate and consumer-driven services and industry, with 69 percent of defaults among firms connected to those sectors.
Zapatero backed away from labour reforms as a means to boost competitiveness and rebalance the economy after Spain's main union threatened a general strike if he touched worker benefits.
That has left Spain with the painful option of reducing costs through a decline in real wages through high unemployment, a process some economists fear could drag on for years.
"The rate of decline is extremely fast," said Stephane Deo, chief European economist at UBS. "Hopefully the slowdown and restructuring in the construction sector will take a shorter period of time than expected." (Reporting by Andrew Hay; Editing by Andy Bruce)