Spain's economy is slowing more sharply than expected after the implosion of the country's property bubble, triggering widespread gloom and rekindling talk that it could leave the single European currency.

The latest statistics paint an even more pessimistic picture than many economists had predicted after a decade-long boom in construction hit the buffers in recent months.

The Spanish Government has announced plans to spend €10 billion (£8 billion) a year in an economic stimulus package intended to soften the blow of a looming housing crisis.

“The deteriorating economic conditions have extended throughout the entire economy,” Nathan Carroll, an analyst for NTC Economics, said. “Commercial activity declined at a record rate on deteriorating domestic demand.

“The services sector's confidence has reached new historic lows [because of the] fear that the economic situation will continue to worsen over the next 12 months.”

New orders, he said, faced “the most intense decline in the study's history” and pending orders followed the negative trend.

Faced by a sudden shortage of would-be buyers, builders in Spain have resorted to offering incentives such as free cars, mortgage holidays and even cash in a desperate bid to shift houses and flats.

Moreover, sales of consumer durables such as washing machines and kitchen equipment dropped 32 per cent in March, according to a Spanish industry group.

Sales of new cars plunged 28 per cent in March from a year earlier, Anfac, the Spanish car manufacturer association, said.

The Spanish services sector purchasing managers' index (PMI) suffered a record decline in March to 40.9, down from 46.1 in February, according to NTC, the market research group. A PMI reading above 50 indicates that in general the sector is expanding, while a reading below 50 suggests a contraction.

Even Spanish success stories such as Inditex, owner of Zara, the high street clothing chain, have been hit by worries about the slowdown in the home market. Shares in Inditex have fallen more than 17 per cent since the start of the year.

The deteriorating situation led the International Monetary Fund last week to cut Spain's growth forecast this year from 2.4 per cent to 1.8 per cent. The IMF expects Spain to grow by only 1.7 per cent in 2009.

Even Spanish banks that had been optimistic about the extent of the slowdown have revised their expectations. Last week, BBVA cut its growth outlook and said that the situation could get worse.

“There is a great deal of uncertainty and downside risk,” José Luis Malo de Molina, head of research at the Bank of Spain, said. “The impact of the economic crisis could be greater, because the impact of the property sector is more intense or the economic turmoil lasts longer.”

The Spanish Government has vowed to prime the pump by spending its budget surplus on public works, such as high-speed rail. It has also confirmed plans for a €400 rebate to taxpayers from July, which it said would boost the fiscal stimulus. BBVA estimates that it could be worth about 1 per cent of GDP.

As a member of the eurozone, Spain cannot lower interest rates or devalue its currency to help, reviving periodic talk that it could leave the single currency altogether.

“It is only a matter of time, probably less than three years, until the euro experiment meets its end,” Avi Tiomkin, an Israeli financier, wrote in Forbes. “Countries like Spain and Italy will withdraw and return to their old currencies.”

Mr Tiomkin argues that Spain's worsening property slump illustrates the problem faced by the “Latin bloc” in the eurozone.

“For years, Spanish home-building and buying outstripped that of Germany, Italy and France combined. Now that the boom has turned to bust, the Spanish central bank cannot lower interest rates. Nor can the Treasury devalue the currency.

"Bound to the euro, Spain can only complain to the European Central Bank, while watching its economy circle the drain.”

Many economists scoff at that commentary, which has been raised before by those who see Spain's economy as dangerously out of step with Europe's other main economies.

Most analysts believe that Spain has reaped great benefits from membership of the euro and would face serious problems if it was to pull out.

The Government also points out - and analysts mostly agree - that the country's financial system is solid. Spanish banks are large, well capitalised and, because of close oversight by the country's central bank, largely avoided stuffing themselves with bad-quality debt or off-balance “special purpose vehicles”.

However, having become accustomed to an economy that has grown at nearly 4 per cent a year, few question that Spaniards are set to feel the economic pain in 2008.

The estimated one million Britons who live in Spain, many of whom own property, are bracing themselves for the downturn, too.

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