* GDP down 1.8 pct qtr/qtr, 2.9 pct yr/yr
* Steepest fall since 1959, according to economists
* Reinforces expectations of Q1 euro zone contraction
* Spain could be last EU country to exit recession
* Spain approves 1 bln euro spending cut
(Adds government spending cut)
By Andrew Hay
MADRID, May 14 (Reuters) - Spain's economy suffered its worst contraction in half a century in the first quarter of 2009, official data showed, worsening a nine-month recession and heightening fears of deeper slowdown in the euro zone economy.
Spanish gross domestic product shrank 1.8 percent quarter-on-quarter, accelerating its fall after a 1 percent contraction in the final three months of 2008, according to a preliminary estimate by the National Statistics Institute (INE).
The figures, smack in line with earlier Bank of Spain estimates, confirmed analysts' expectations of a 2 percent contraction in the euro zone in the first quarter, ahead of an official estimate for the 16-nation bloc on Friday.
"This will not change the consensus forecast for euro zone GDP," said economist Martin van Vliet at ING. "I think for Spain, and the rest of the euro zone, the first quarter was the worst of the recession, the peak of decline."
Spanish GDP fell 2.9 percent year-on-year in the first quarter, over four times a 0.7 percent contraction in the final three months of 2008.
The quarterly and annual GDP results were the worst in official records dating back to 1970 and the steepest falls since 1959, according to private economists.
On the surface, the data would seem to indicate that Spain is suffering less than some of its euro zone partners such as Germany, where the government has said GDP probably contracted by around 3.5 percent in the first quarter on a quarterly basis.
But headline GDP is flattered by a rapidly decreasing drag on overall output from Spain's traditionally large external trade deficit, as imports collapse.
SPAIN COULD LAG IN RECOVERY
Retail sales sliding by 8 percent in March and rocketing unemployment, which is rising more quickly than in any other major economy and has almost doubled in a year to 4 million, provide a clearer indication of the economic pain.
As do the lines of boarded-up shops seen on Spanish streets and long queues outside dole offices.
The European Commission expects Spain to be the last member of the European Union to exit recession, probably during 2011, as it pays for the excesses of a decade-long housing boom during which the current account deficit hit 10 percent of GDP.
"In a context in which the pace of recession deepened meaningfully across all the euro zone in Q1, Spain looks more vulnerable than other countries due to its strongly unbalanced growth model, heavily relying on credit-fuelled domestic demand and a housing boom," said Tullia Bucco of UniCredit.
Spain needs to take measures to boost competitiveness instead of relying on more than 70 billion euros ($95 billion) in spending and bank sector aid, Bucco said.
Businesses have called for hiring and firing to be made cheaper and easier, but Socialist Prime Minister Jose Luis Rodriguez Zapatero has promised unions he will not do so.
"We're not talking about a correction, we're talking about a crisis," said Carlos Maravall, economist at the AFI consultancy. "There is no sign of any end to this before the end of 2010."
The stimulus package and downturn have cost the government dearly, turning a public surplus of 2.2 percent of GDP in 2007 into an estimated 8.3 percent deficit this year.
In an attempt to rein in spending, the cabinet approved what it called austerity measures on Thursday which cuts government spending by 1 billion euros, following a similar cut in February of 1.5 billion euros.
Spain was the first of the euro zone's four largest economies to release first quarter growth data, and will release final data with a sector breakdown on May 20. (Additional reporting by Paul Day) (Reporting by Andrew Hay and Jason Webb; Editing by Victoria Main and Toby Chopra)