MADRID, Oct 1 (Reuters) - Spain's growth outlook is stillweighed down by austerity measures like wage cuts, pensionfreezes, the axing of welfare payments and cancelling ofstate-funded infrastructure contracts.

The Spanish economy emerged from more than a year and a halfof recession in the first quarter, but few economists believe growth will last and many forecast Gross Domestic Product willshrink again before the end of 2010.

Opposition parties say an overhaul of labour laws, which thegovernment say was needed to cut 20 percent unemployment andimprove competitiveness, but drew union anger, has not gone farenough. Spain has avoided a Greek-style debt crisis for now, butconcerns over the health of the euro zone's peripheral economiesstill undermine investors' confidence.

Following are some of the key factors to watch:

LOSS OF CONFIDENCE IN GOVERNMENT

Prime Minister Jose Luis Rodriguez Zapatero's hold on hisSocialist party is still firm but he has faced severalhalf-hearted calls from the main opposition party for him tostep down.

The Socialists struggled to pass key reforms designed to getthe economy motoring again and have lost their once tightrelationship with labour unions.

But Zapatero looks to have cleared the toughest hurdle thisyear in securing support for the 2011 budget from the BasqueNational Party in return for some concessions to autonomy in thenorthern region. Had that failed, he could have faced ano-confidence vote and calls for early elections.

Polls show the Socialists, whose term is up in 2012,trailing the opposition by about 10 percentage points in anearly election scenario.

What to watch:

-- Signs the government can no longer count on the supportof key minority parties, such as Catalan nationalistsConvergencia i Unio (CiU) and the Basque Nationalist Party(PNV).

-- Any criticism of Zapatero from within his own party.

DEFICIT CUTS FALL SHORT

Investors will keep a close eye on the government's pledgeto slash the public deficit to the European Union guideline of 3percent of GDP by 2013, from 11.1 percent in 2009.

Some analysts say measures have not gone far enough --including a 15-billion-euro austerity plan announced in May ontop of earlier cuts, and July's rise of two percentage points inthe base rate for value-added tax.

At the same time, austerity will be a drag on economicrecovery and could prompt a double-dip recession.

Official forecasts, considered optimistic, see an economiccontraction of 0.3 percent in 2010 followed by a 1.3 percentexpansion in 2011.

However, Spain faces less immediate pressure than Greeceover its financing needs as its public debt-to-GDP ratio is oneof the lowest among OECD countries at a forecast 62.8 percent in2010. What to watch:

-- Will public opinion oppose more spending cuts? Spain'sautonomous regions, which account for around half of thecountry's budget, will also be key.

-- Any further move by ratings agencies to lower theiroutlooks on Spain. On June 30, Moody's said it was reviewingSpain's sovereign debt rating and may lower it by as much as twonotches. On April 28 Standard and Poor's downgraded Spain'scredit rating and on May 28 Fitch did the same.

The spread between Spanish government bonds and euro zonebenchmark bunds hit a record high of 238 basis points in June,way up on the 75 bps level seen in April. At the end ofSeptember it was back up close to 200 bps as investors frettedover possible assistance to fellow struggler Ireland.

-- The government is due to restart talks this autumn on pension reform that would delay the retirement age.

UNIONS

Unions held a general strike on Sept. 29 to protestausterity and the labour reform. The strike caused transportdisruption and was strong in industrial sectors but was notmassively supported, according to the government.

Unions represent only 16 percent of the workforce and theyare not likely to affect austerity plans.

What to watch:

-- Economists say labour reform failed to tackle the keyissue of collective bargaining, whereby companies are forced tomake wage agreements across entire business sectors.

-- Will a Sept. 29 strike be repeated? Earlier strikes inSpain have not been debilitating.

UNEMPLOYMENT KEEPS RISING

The unemployment rate rose for a 12th consecutive quarterbetween April and June. The rate of 20.09 percent was thehighest since 1997 and analysts see it rising further.

What to watch:

-- Any significant rise in the jobless rate above 20 percentwill reduce consumer spending and force the government to spendmore on unemployment benefits.

REGIONAL BANK RESTRUCTURING

Spain's restructuring of its banking sector has so far costabout 11 billion euros and was partly state-funded, reducing thenumber of savings banks to 19 from 45 through mergers andtakeovers. Concerns linger that Spain's banks are stillexcessively exposed to falling property values, however.

In Europe-wide bank stress tests published on July 23, whichincluded 95 percent of Spain's banking system, five savingsbanks failed the severe downturn scenario and the central banksaid the system would need an additional 1.835 billion euros torecapitalise.

What to watch:

-- Any more big defaults by property developers.

-- Any significant rise in non-performing loans. The averageNPL ratio was 5.47 percent in July.

-- Signs of failed attempts by the savings banks to raisecapital from the markets, which they are now allowed to do.

ETA

Basque separatist group ETA laid out the conditions to endits violent campaign for independence in the region aftercalling a truce in early September. But the government says thetruce is insufficient and demands the group lay down its armsand announce its dissolution.

ETA has killed over 850 people in a four-decade campaign forindependence in the northern region, but has been crippled by arecent spate of arrests of its members as well as the support ofFrench and Portuguese police in finding arms caches.

Political wing Batasuna is urging the group to stop itsviolence, so that it may be declared legal in time to run forBasque municipal elections next year.

What to watch:

-- Any declaration of a full, verifiable ceasefire by ETA.

-- Any willingness by the government to negotiate with ETAif there is a secure ceasefire. (Reporting by Nigel Davies, Editing by Sonya Hepinstall)