UPDATE 3-Spanish PM says will not stand in 2012 elections

* Spain’s Zapatero says will not seek third term in 2012

* Socialists primaries to come after May regional poll

* Economic crisis eroded Zapatero’s popularity

* Market reaction eyed on Monday as banks look shaky

(Updates with details, background, analyst comment)

By Judy MacInnes

MADRID, April 2 (Reuters) – Spanish Prime Minister Jose Luis
Rodriguez Zapatero, his popularity hammered by the euro zone’s
highest jobless rate, said on Saturday he would not seek a third
term in 2012 elections his Socialists are expected to lose.

Popular Deputy Prime Minister Alfredo Perez Rubalcaba and
Defence Minister Carme Chacon are seen as possible successors to
revive the ruling Socialists, who trail the centre-right
opposition Popular Party by up to 15 points in opinion polls.

“I will not be a candidate in the next general elections,”
Zapatero told the Socialist’s Federal Committee meeting. The
announcement was widely expected.

But the Socialists’ leader said he would serve out the
remainder of his term and focus on carrying out his programme of
reforms to overhaul Spain’s sickly economy.

Zapatero, 50 and in office since 2004, saw his popularity
plunge as he imposed spending cuts and economic reforms to keep
Spain from spiralling into a fiscal crisis and following Greece
and Ireland into a European Union bailout.

The euro zone’s fourth largest economy came under attack in
bond markets after a real estate bubble burst in 2008, causing a
recession and 20 percent unemployment. Spain’s recovery has
lagged behind the rest of Europe.

There are some parallels with Portugal, where political
turmoil last month brought down the government.[ID:nLDE72N0NZ]

Like Portuguese Prime Minister Jose Socrates, Zapatero’s
government also lacks a majority.

The Popular Party has pledged to deepen spending cuts and
trim what it says is more fat from public administration if it
wins power. Polls show the PP winning general elections if they
were held now, even though PP leader Mariano Rajoy is not much
more popular than Zapatero.

The PP also is expected to do well in local and regional
elections on May 22. The Socialists hope Zapatero’s announcement
will help the party regain some credibility and recover votes.

PRIMARIES AFTER MAY POLL

Zapatero’s move triggers primaries for a new party leader, a
process which he said would be up to the Federal Committee to
decide but would not take place before the May polls.

The succession could shift focus from the government’s
pledge to push on with reforms to stabilise public finances and
ensure Spain meets its deficit targets, an economist said.

“I don’t think Zapatero’s announcement will spark
confidence. A period of uncertainty and doubt has now opened up
with the succession issue, which has a political cost,” said
Santiago Carbo, economics professor at the University of
Granada.

Rubalcaba, 59, is one of Spain’s most popular politicians
and is seen as a frontrunner for primaries. His only serious
rival is 40-year-old Defence Minister Chacon.

FRESH MARKET ATTACKS?

Whoever is elected Socialist party leader-in-waiting will
have to convince markets they are committed to reforms or Spain
may once again become a target for speculators, economists said.

“It will be key to see how far the candidate’s policy is in
line with the government’s commitments to the European Union,”
said Emilio Ontiveros, chairman of International Financial
Analysts.

Spain has been under market scrutiny since Ireland accepted
a bailout late last year, but spending cuts and reforms of the
labour, pension and banking sector have kept the wolves at bay.

The premium investors demand to hold Spanish over German
debt rose to euro-lifetime highs of over 300 basis points at the
end of 2010, but has since stabilised at just below 200 bps,
still a long way from pre-euro crisis levels of under 60 bps.

“It’s a tough call to say how the markets will react on
Monday,” an analyst at a Spanish bank said.

“The timing in terms of impact for the sovereign (debt)
might not be optimum given the fresh concerns which have flared
up over the health of Spain’s savings banks.”

On Friday, savings banks Caja Mediterraneo (CAHM.MC: Quote, Profile, Research) said it
would seek 2.8 billion euros in state funds after a planned
merger with three other regional banks failed.[ID:nLDE730069]

The announcement sparked fears that there might be more
skeletons in the mostly unlisted savings banks’ cupboards.
(Additional reporting by Jesus Aguado, Manuel Maria Ruiz and
Iciar Reinlein; editing by Fiona Ortiz and Richard Meares)

UPDATE 3-Spanish PM says will not stand in 2012 elections