* Q1 GDP -1.9 percent qtr/qtr vs -1.8 percent estimate
* Domestic demand -5.3 percent, household spending -4.1
* Econ Sect Campa says economic decline easing
* Campa cannot say when will return to low growth
* Campa says comfortable with labour reform proposal
* Salgado says govt working on range of reforms
(Adds Economy Minister's comments on reforms)
By Andrew Hay
MADRID, May 20 (Reuters) - Spain's economy contracted more than expected in the first quarter as soaring unemployment heralded a long recession and prompted the government to promise deep reforms to recoup growth.
Gross domestic product (GDP) shrank 1.9 percent quarter-on-quarter, even worse than a preliminary estimate of a 1.8 percent fall, as Spain suffered its worst contraction in half a century, the National Statistics Institute reported.
Hefty public spending by Socialist Prime Minister Jose Luis Rodriguez Zapatero made the only positive contribution to GDP.
All other sectors sank and domestic demand fell 5.3 percent as the twin shocks of the global crisis and a housing collapse sent unemployment to over 4 million or 17.4 percent -- by far the highest rate in the European Union.
Newly-appointed Economy Secretary Jose Manuel Campa said the slowdown should ease in the second quarter and the government planned reforms to overhaul the construction-dependent economy.
But he could not say when Spain would return to growth.
"The worst part of the crisis is unemployment and structural reforms are needed to turn our economy into one that allows sustainable growth, that's our main goal," Campa said during his first public appearance.
Speaking before parliament later on Wednesday, Economy Minister Elena Salgado said the government was working on a wide range of reforms in sectors including education, services, infrastructure, housing, the financial system, energy and taxes.
"The measures already in place, and those to be introduced, are aimed at reactivating the economy and taking us toward a productivity model which is more balanced and more sustainable," Salgado said.
"While we should view any signs of recovery with caution... it does seem there is light at the end of the tunnel which isn't a train coming in the other direction."
REFORM FEVER
The European Commission expects Spain to be the last member of the European Union to exit recession, probably in 2011, after 15-straight years of rapid growth driven by housing investment, consumer spending and creation of millions of low-skill jobs.
Spain's first quarter results would have been far worse without a 22 percent fall in imports which reversed their traditional drain on GDP, adding 2.3 percentage points to year-on-year growth, which still fell 3 percent.
That highlighted Spain's dependence on its depressed domestic economy and its lack of a strong export sector to spur recovery once the global economy picks up.
The International Monetary Fund says Spain risks a decade of weak growth like those suffered by Japan and Germany as it retools its economy to compete in global markets.
"You will have a much clearer rebound in Germany whereas Spain is in for a long period of healing and reconstructing," said Giovanni Zanni at Credit Suisse.
The most urgent overhaul is to Spain's jobs market which, with the highest rate of temporary contracts in the EU and the highest firing costs for long term employees, is destroying tens of thousands of part time posts each week.
"The government is determined to change the growth model of this country and improve competitiveness," Zapatero told Congress on Wednesday, after being forced to water down his latest economic stimulus package to pass it through an increasingly hostile Congress.
Zapatero has shied away from labour reforms after union allies threatened general strikes, but he faces pressure to try new tactics after 1.8 million job losses in the last year, or nearly half of all layoffs in the European Union.
The appointment of Campa as second in command at the Economy Ministry may signal a change of course.
The 44-year-old former finance professor was one of 100 Spanish economists who in April proposed a sweeping labour reform to create a single contract with lower firing costs and more flexible collective salary bargaining negotiations.
"These proposals have to be on the negotiating table," Campa said on Wednesday when asked if he stood by the reform plan. (Reporting by Andrew Hay; Additional reporting by Ben Harding and Manolo Ruiz; Editing by Toby Chopra)