Spain's economy shrank for the seventh straight quarter from January to March, preliminary data showed on Tuesday, and the recession looks set to last into next year.

Acute joblessness and grim economic data from Spain and other euro zone countries have fueled a raging debate over whether Europe should abandon austerity policies that are still favoured by regional powerhouse Germany.

Spain's Gross Domestic Product contracted 0.5 percent in the first three months of this year from the last quarter of 2012, according to preliminary data from the National Statistics Institute, dragged lower by sliding domestic demand.

The Spanish government slashed its economic forecasts for this year on Friday, bringing expectations closer to consensus, though did not announce any significant updates to its vital reform plan designed to restart the economy.

"We recognize the reforms of the government have been significant, but the problem is the starting position of the Spanish economy was much worse than any other European economies and adjusting in this environment is a lengthy process," analyst at Nomura Silvio Peruzzo said.

"We don't see Spain returning to growth until some time next year."

The economy shrank 2 percent on an annual basis in the first quarter, worse than the 1.9 percent registered a quarter earlier and the worst annual contraction since the start of the current recession in the last quarter of 2011.

Spain has been in and out of recession since 2008 when a property bubble burst and put millions out of work and gutted consumer and business confidence. The country is still struggling to replace the once-booming construction sector to boost growth.

The euro zone's fourth largest economy has been on the front line of the bloc's debt crisis on concerns over one of the regions highest public deficit, prompting Madrid to pass a slew of austerity measures critics say has hobbled recovery.

The government, meanwhile, says the worst of the slump has passed and sees quarterly growth before the end of this year mostly because the country has become more competitive and exports are growing.

"All the indicators which look forward in Spain point to recovery, and a much better economy than one year ago," Economy Minister Luis de Guindos said in a radio interview on Tuesday.

(Reporting By Paul Day)