Spain will cut its 2008 economic growth forecast to around 3 percent from a previous 3.3 percent because of market turmoil affecting the euro zone's fastest-growing major economy, the government said on Thursday.

The downgrade by Spain follows similar moves by international agencies and banks over concerns its high level of household and corporate borrowing in recent years has exposed it to the global credit crunch.

"We will make a revision that will incorporate this new situation, but we understand it will have a limited impact and we continue to think that around 3 percent growth continues to be perfectly possible," Secretary of State for the Economy David Vegara said in a Senate briefing.

Spain's economy, fourth largest in the euro zone, has outperformed the rest of the currency bloc for over a decade but is slowing as higher European Central Bank interest rates cool credit-driven construction investment and consumer spending.

Spanish growth slowed to its lowest pace in over a year in the third quarter but was supported by export growth that was the strongest since the first quarter of 2001.

Economy Minister Pedro Solbes says Spain is on track to grow 3.8 percent in 2007 -- over a percentage point above the euro zone average -- after 5-year high expansion of 3.9 percent in 2006.

The International Monetary Fund says Spain is vulnerable to the global liquidity squeeze owing to its need for foreign credit to cover a current account deficit that is the world's second largest in absolute terms, after that of the United States.

The IMF last month cut its 2008 growth forecast for Spain to 2.7 percent from 3.4 percent and the European Commission recently reduced its estimate to 3 percent.

The opposition Popular Party said that even at 3 percent, the government's 2008 growth forecast is over-optimistic and aimed at winning votes in March general elections.

"It doesn't take into account the serious economic risks Spain faces in 2008 after the rise in corporate and household debt," said PP economic spokesman Miguel Angel Arias Canete during an economic seminar.

INFLATION 14-MONTH HIGH

Complicating Spain's economic slowdown is a spike in inflation which reached a 14-month high of 3.6 percent in October.

Milk prices have risen 25 percent in the last year, and bread is 14 percent more expensive, hurting highly indebted Spanish households struggling to repay mortgage interest rates that are near a 7-year high.

Vegara said inflation could rise again in November, after which he saw a stabilisation in global oil and grain prices that could lead to a decline in Spanish consumer price growth beginning early next year.

"There will be a marked decline in inflation by the end of next year due to base effects," Vegara told reporters.

Vegara said a strong euro versus the dollar was a negative factor for exports but saw its impact limited, given that 70 percent of Spanish exports are to the euro zone.

The Popular Party, marginally trailing the Socialists in the polls, has proposed sweeping tax reforms to support the slowing economy.

The party's flagship plan is to exempt 7 million Spaniards who earn less than 16,000 euros a year from paying income tax.

Treasury Secretary Carlos Ocana told the Senate the Popular Party's proposal would cost the Spanish state 25 billion euros, and cut central government spending by half.

"It's not a viable proposal but a siren call," Ocana told the Senate during a briefing, adding that the government would consider further tax cuts if given another term, economic conditions permitting.