* Budget shows net debt issuance will drop in 2011* Bond market reflects relief downgrade wasn't steeper

By Andres Gonzalez and Nigel Davies

MADRID, Sept 30 (Reuters) - Spain lost its final triple-Adebt rating on Thursday as it launched an austere budget aimedat convincing financial markets it can get its budget deficitdown despite a struggling economy.

Moody's was the third rating agency to cut Spain out of thetop-rated category which helps it finance its debt relativelycheaply though the move had been expected and it said it hopednot to move again soon, helping strengthen Spanish debt markets.

But the agency also warned that a poor growth outlook meantMadrid would have to take further steps to meet its deficittargets in years to come. The Bank of Spain said a sluggishrecovery would slow further in the third quarter.

"A large part of the fiscal consolidation for this year andnext is based on tax increases and measures that cannot becontinued for many years," Moody's lead analyst for Spain,Kathrin Muehlbronner, told Reuters.

"Spain will need more structural measures to bring down itsdeficit."

The government has slashed public spending in the eurozone's fourth biggest economy to tame a huge deficit afterinvestors punished its sovereign bonds earlier this year, hopingto differentiate itself from Greece, Ireland and Portugal.

Millions of Spaniards joined a general strike on Wednesdayto protest against public sector cutbacks -- the budget shows areduction of 7.9 percent in spending next year -- and a labourmarket reform that has already become law and aims to make iteasier for companies to hire and fire.

A copy of the government's 2011 budget, obtained by Reutersahead of its presentation to Congress on Thursday, showed aplanned cut in net debt issuance next year to 43.3 billion eurosfrom 76.2 billion euros in the 2010 budget.

But echoing many economists' view that budget cuts will pushSpain back into recession this year, Moody's forecast averageeconomic growth of just 1 percent over the next few years asSpain tries to reconstruct its property-dependent economy.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a story on Moody's downgrade [ID:nLDE68T0FF] For a story on Spain's budget [ID:nLDE68T0BA] Spain will survive latest downgrade [ID:nLDE68T0KE] For a graphic on credit ratings http://r.reuters.com/get52k



Unions are also protesting against plans to reform pensionsand extend the retirement age to 67 from 65 but Socialist PrimeMinister Jose Luis Rodriguez Zapatero has pledged to stick withausterity needed to make the economy more competitive.

Zapatero's minority government is expected to pass thebudget before the end of the year, since he previously securedthe backing of the Basque National Party this month in returnfor some concessions to autonomy in the Basque region.

The budget document said amortizations would rise next yearand and gross debt issues come down. However, interest paid onthe state's debt in 2011 would rise to 27.4 billion euros, or2.5 percent of GDP.

The government also maintained an outlook for 1.3 percentexpansion of gross domestic product next year.

After the Moody's announcement, Economy Secretary JoseManuel Campa told Reuters the government was satisfied with theagency's assessment of Spain's fiscal measures as achievablethis year.

But he criticized Moody's view on growth.

"We believe that outlook is excessively pessimistic," hesaid.

The spread in Spain's 10-year bond yields over benchmarkGerman debt narrowed to 185 basis points, the tightest sinceSept 27. <ES10YT=TWEB> <DE10YT=TWEB> Spanish stocks <.IBEX> fell0.3 percent, in line with other European markets.

"The one notch cut (by Moody's was widely expected by themarkets. But I would highlight the reference to Spain remainingvulnerable to further market stress, particularly in the contextof its debt refinancing needs for 2011 and 2012," CitigroupEconomist Giada Giana said.

"I think the growth forecast of an average 1 pct annually forthe coming years is still too high. We see 2011 growth close toflat or even negative for next year," she said.

(Editing by Patrick Graham)