* To offer stakes in lottery, airport business
* PM presents new tax model for small companies
* PM cancels South America trip to focus on economy
* Economy Minister says new steps won't affect deficit goal
(Adds U.S. envoy statement, lottery background, link to story on airport and lottery privatisation plans)
By Paul Day
MADRID, Dec 1 (Reuters) - Spain said it would sell off more state assets and axe a jobless benefit, stepping up efforts to slash costs and persuade markets it will not need a bailout as its prime minister pulled out of a summit in Latin America.
News of the cuts and planned sales was well received in Brussels, which risks facing an insurmountable bill if Spain and other large economies apply for EU funds.
Premiums on Spanish bonds fell along with spreads on other euro zone peripheral debt, having received a hammering since Ireland agreed to outside help on Sunday.
Jose Luis Zapatero said he was ending a payment of 426 euros a month to the long-term unemployed, a year after it was introduced for claimants whose benefit had run out. It had been taken up by around 70,000 people.
And Madrid plans to sell 30 percent of its nearly 200-year-old state lottery, let private companies take 49 percent stakes in airports and airport services, and move to support small and medium-sized firms. The lottery, one of the world's largest and best known for its "El Gordo" draw each Christmas, is a cash cow for the state.
A government spokesman said Zapatero had cancelled a trip to Argentina to focus on his country's problems, highlighted on Wednesday by weak manufacturing data.
Spain, the 16-nation euro zone's fourth biggest economy, has struggled to recover after a property boom collapsed and is racing to reassure investors who are driving up its borrowing costs.
European Competition Commissioner Joaquin Almunia -- himself a Spaniard -- said the government's latest moves showed its determination to overcome Spain's problems.
"We are sure that ... they will help reinforce confidence in Spain," he told a news conference.
Madrid has argued an initial raft of austerity measures, including civil servant pay cuts, tax hikes and frozen welfare payments, and a tight 2011 budget went far enough to rein in the public deficit, but also said it would do more if necessary.
Zapatero has sought to avoid spooking markets with big initiatives that might be seen as a sign of panic, and instead drip-fed actions over the last week to try to show his government means business.
The premium investors demand to hold Spanish over German touched euro-era records on Tuesday but fell back on Wednesday as traders bet the European Central Bank could help by increasing its bond-buying programme.
MEASURES 'WELL TIMED'
U.S. Treasury Undersecretary Lael Brainard joined the support for Zapatero's efforts while on a visit to Madrid, praising his "ambitious steps to address the challenges at hand."
Spain's biggest airports, Madrid and Barcelona, would be run privately through concessions, the prime minister said. Both are currently state-owned.
The government believes airports authority AENA could be worth up to 30 billion euros ($39 billion). By comparison, Spain's public sector deficit is expected to total around 9.3 percent of gross domestic product (GDP) this year, a little less than 100 billion euros.
The new measures were well timed ahead of a debt auction planned for Thursday, a Madrid-based trader noted.
"I don't know what kind of help for the economy what was announced today will be, but it's a clear message to the market that they are taking measures in light of how much yields have risen in the last few weeks," he said.
The Treasury will issue between 1.75 billion and 2.75 billion euros in 3-year bonds at a 2.5 percent coupon on Thursday in what is considered a key test for the country's ability to raise funds in the open market.
Last week Economy Minister Elena Salgado said three remaining bond auctions to be held this year would go ahead, but they would be for less than originally planned.
Spain had one of the highest public deficits in the euro zone in 2009 of 11.1 percent and has passed austerity plans and introduced spending cuts as part of next year's budget worth around 50 billion euros to reduce the shortfall. However, these are taking their toll on the economy.
Spanish unemployment fell for the first time in over 3 years in the third quarter but remains the highest in the euro zone at 19.8 percent.
A survey on Wednesday showed Spanish factory output stuttered in November, with a weak domestic market outweighing export gains, while carmakers association ANFAC said sales fell by 25.5 percent in November from a year earlier, the fifth month of double-digit declines after the government ended subsidies.
The measures aimed at smaller businesses would not affect the government's commitment to slash the public deficit to 6 percent of GDP next year, Salgado told parliament.
"The deficit target is unconditional. All our goals are secondary to this 6 percent," Salgado said.
(Reporting by Paul Day; Editing by Alexander Smith/Ruth Pitchford)