Spanish PM is boosted by opposition leader's woes

MADRID, Sept 6 (Reuters) Trouble in the leadership of Spain's conservative opposition has given fresh heart to Socialist Prime Minister Jose Luis Rodriguez Zapatero just as the economy turns into a problem for his re-election hopes.

Though the Socialists have a lead of three to four percentage points in opinion polls, a squeeze on home-buyers has commentators predicting a tight contest in a general election due by March.

The darkening economic weather could work in favour of the conservative Popular Party -- but tensions over the future of its leader Mariano Rajoy have complicated the picture.

Rajoy has been forced to deny his leadership is in danger amid media speculation that the ambitious mayor of Madrid, Alberto Ruiz Gallardon, is manoeuvering to replace him.

The decision of another PP heavyweight, Rodrigo Rato, to quit his job running the International Monetary Fund and return home has further fed rumours about Rajoy's long-term future.

Rajoy's discomfort has brought relief to the Socialists just as the Popular Party was hoping to gain political capital from rising interest rates which are squeezing millions of Spaniards with home mortgage loans.

''Rajoy is in his political death throes,'' said Diego Lopez Garrido, Socialist spokesman in the Chamber of Deputies.

Critics of Rajoy, a former interior minister, say he irritated voters by spending too much time criticising the government's failed attempts to negotiate peace with Basque rebels ETA, to the exclusion of other areas of policy.

Lopez Garrido pointed to opinion polls showing most Spaniards believe Rajoy will lead the Popular Party to defeat.

''They think he will lose. That's why there's so much turmoil within the Popular Party,'' the parliamentarian told Reuters.

SOCIALISTS FEAR YOUTH APATHY But Lopez Garrido admitted the Socialists might struggle to mobilise the young voters who helped tip the 2004 election narrowly in their favour in a surprise result.

That election was electrified by Islamist bombings on Madrid trains, which the then Popular Party government, which had led Spain into an unpopular war in Iraq, tried to blame on ETA.

''It's possible that turnout could fall among voters who were motivated by very specific issues four years ago,'' Lopez Garrido said. ''That's what we've got to do: get the people who voted for us in 2004 to realise that it's important they vote again.'' The 47-year-old Zapatero, who has legalised gay marriage and reduced the influence of the Catholic Church in education, has more appeal for the young than the avuncular, bearded Rajoy, commentators agree.

But many young people are finding it increasingly difficult to afford housing and the PP can count on a core vote which has been mobilised by opposition to the talks with ETA.

''We are closing in. The Socialists are losing support,'' said PP foreign affairs spokesman Gustavo de Arestegui. ''There are 8.5 million mortgages in Spain,'' he added.

Zapatero has already fired the first salvos in the campaign, with promises of a 2,500-euro payment for newborns, a steep rise in minimum pensions and more subsidised housing.

But shadows are spreading from the economy after a decade in which a consumer and housing boom have been fuelled by record levels of debt. The subprime crisis in the United States has increased nervousness and unemployment is rising.

''If (the economy worsens), then, it's a shame for the government, because it's going to do very badly,'' said Juan Diez Nicolas, of the ASEP consultancy.

REUTERS JK RK1728