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

(Adds minister comment, background, updates prices)
By Andres Gonzalez and Nigel Davies

MADRID, Sept 30 (Reuters) - Spain lost its final top-line
debt rating on Thursday as the government sought parliament's
backing for a budget it hopes will convince financial markets it
can cut its deficit while the economy struggles.

Moody's was the third agency to cut the triple-A rating
which has helped Spain finance its debt relatively cheaply but
also aided excessive borrowing before an economic crisis took
hold in 2008. Spain had held AAA status on all its ratings since

The cut had been expected and Moody's said it hoped not to
have to cut again soon, bolstering Spanish debt markets.

But the agency also said a poor growth outlook meant Spain
would have to take further steps to meet its deficit targets in
years to come -- the key to seeing off a debt crisis which has
threatened to engulf it as it did Greece earlier this year.

The Bank of Spain separately said that a sluggish recovery
would slow further in the third quarter.

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

"Spain will need more structural measures to bring down its

The government has slashed spending in the euro zone's
fourth biggest economy, hoping to differentiate itself from
Greece, Ireland and Portugal as investors drive up the premium
for borrowing to some of the euro zone's high-deficit countries.

Millions of Spaniards joined a general strike on Wednesday
to protest against public sector cutbacks -- the budget
envisages a 7.9 percent cut in spending for next year -- labour
reforms aimed at making it easier for companies to hire and
fire, and plans to extend the retirement age to 67 from 65.

Unemployment was over 20 percent in the second quarter,
twice the euro zone average, and the government revised up its
forecast to 19.8 percent this year and 19.3 percent in 2011.

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
For an analysts view [ID:nLDE68T0NG]



Many economists believe budget cuts will push Spain back
into recession this year, and Moody's forecast average economic
growth of just 1 percent over the next few years as the country
tries to rebuild its property-dependent economy.

Economy Minister Elena Salgado told a news conference after
presenting the budget to lawmakers that she expected Spain to be
able to continue issuing debt at "very reasonable" cost, and
that it would press on with its austerity plans.

Details from the 2011 budget showed a planned cut in net
debt issuance next year to 43.3 billion euros from 76.2 billion
euros this year. However, interest paid on the state's debt in
2011 would rise to 27.4 billion euros, or 2.5 percent of GDP.

Socialist Prime Minister Jose Luis Rodriguez Zapatero's
minority government expects to pass the budget before the end of
the year, having won the backing of the Basque National Party
with concessions to autonomy in the northern Basque region.

The government also maintained a growth forecast of 1.3
percent for 2011 expansion of gross domestic product next year.

After the Moody's announcement, Economy Secretary Jose
Manuel Campa told Reuters the government was satisfied with the
agency's assessment of Spain's fiscal measures as achievable
this year.

But he criticized Moody's view on growth. "We believe that
outlook is excessively pessimistic," he said.

The spread in Spain's 10-year bond yields over benchmark
German debt narrowed about seven basis points from a day
earlier, to 189 bps. <ES10YT=TWEB> <DE10YT=TWEB> Comparable
spreads on Irish and Portuguese bonds have soared well above 400
basis points on concerns over looming credit problems.

Spanish stocks <.IBEX> fell just around 1.0 percent, in line
with other European markets.

"The one notch cut (by Moody's was widely expected by the
markets. But I would highlight the reference to Spain remaining
vulnerable to further market stress, particularly in the context
of its debt refinancing needs for 2011 and 2012," Citigroup
Economist Giada Giana said.

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

(Writing by Fiona Ortiz; Editing by Patrick Graham and John