Spain's national bank issues recession warning

Spain is in a deep recession, its national bank has warned a day after clashes in Madrid between protesters and the police led to 38 people arrested and 64 injured.

The demonstrations against the government's austerity drive at a time of mass unemployment put in sharp relief the scale of discontent brewing in a country suffering its second recession in three years and an jobless rate of nearly 25%.

In the wake of the clashes and a warning from the central bank that the country's economy continues to shrink "significantly," financial markets have grown increasingly nervous.

The protest saw an estimated 6,000 people converge on the national parliament building in central Madrid. More than 1,000 riot police blocked off access to the building, forcing protesters to crowd nearby avenues. Police baton-charged those at the front of the march and some demonstrators broke down barricades and threw rocks and bottles.

Smaller demonstrations attracted hundreds of protesters in Barcelona and Seville.

The protesters are calling for fresh elections, claiming the government's hard-hitting austerity measures are proof the ruling Popular Party misled voters when it won power last November.

A National Police spokeswoman said 27 of the injured were police officers.

The government praised the police, saying the protest was an attack on democracy.

Opposition Socialist party spokesman Eduardo Madina said the government should take note of the popular discontent, adding that some images of the police charges displayed "pure brutality."

The government is expected to present a new batch of economically painful reforms tomorrow when it unveils a draft budget for 2013. Even before enacting the new measures, it was predicting a 1.5% economic contraction this year. The Bank of Spain's warning suggests it may be more.

On Friday, an auditor will release the results of stress tests on Spanish banks hit hard by the collapse of the country's property sector, which drove economic growth until the 2008 financial crisis hit. The government will then judge how much it will need to help bail out the banks.

Spain is also under pressure from investors to apply for European Central Bank assistance in order to keep its borrowing costs down.

Prime minister Mariano Rajoy has yet to say whether Madrid will apply for the aid, knowing that such assistance comes with conditions.