March 9 (Bloomberg) -- Jose Luis Rodriguez Zapatero won a second term as Spanish prime minister after pledging tax cuts and more government spending to weather an economic slowdown.

Zapatero's Socialist Party won 43.8 percent of the vote compared with 40.2 percent for the opposition People's Party with 93 percent of votes counted, the Interior Ministry said on its Web site. That will give Zapatero 168 seats out of the 350 in the parliament compared with 154 for the PP, according to projections. Zapatero currently has 164 seats.

The Socialists overcame fallout from slowing economic growth and also Zapatero's failed peace negotiation with Basque terror group ETA to defeat PP leader Mariano Rajoy for the second time. His second term begins with unemployment rising, economic growth slowing and the inflation rate at a 12-year high.

``The Spanish people have spoken clearly and they have decided to open a new phase,'' Zapatero told supporters in Madrid. ``I will govern for all, but thinking above all of those who don't have it all.''

Voting was overshadowed by the March 7 murder of a former local politician in Spain's northern Basque region, a killing that Zapatero attributed to ETA. The murder came on the last day of the official campaign period and led political leaders and the victim's daughter to call for a massive turnout as a way of condemning ETA.

Eligible Spaniards

Three quarters of eligible Spaniards went to the polls, the ministry said. That compares with more than 77 percent in 2004 when the Madrid train bombings fueled a surge in turnout that led to Zapatero's surprise victory over Rajoy. The bombing by Islamic militants three days before the vote led to a backlash against the government that tried to blame the atrocity on ETA.

Throughout the election campaign, Rajoy accused Zapatero of lying about his contacts with ETA after the prime minister's bid to negotiate a peace deal with the group collapsed when ETA set off a car bomb at the Madrid airport that killed two. ETA has killed more than 800 people during a four-decade battle to win independence for seven Basque-speaking provinces in northern Spain and southwestern France.

The prime minister won over voters concerned about slowing growth and rising unemployment by promising a 400-euro ($615) tax cut for all Spanish workers, an increase in the lowest state pensions and government action to help laid-off construction workers. The government posted a record budget surplus last year, equivalent to 2.2 percent of gross domestic product.

`Bumpy Ride'

``It is going to be a bumpy ride for the Spanish economy,'' Martin Van Vliet, an economist at ING Bank in Amsterdam, said. ``The property slump will be a significant drag on economic growth this year and is undoubtedly going to cost more jobs.''

Growth in Spain's economy may slow to the euro region average for the first time in 15 years in 2009 as the collapse in residential construction saps the confidence of consumers and executives, economists say. Home-building, which peaked at around 800,000 units in 2006, may fall by as much as half before it reaches a sustainable pace, Zapatero said.

Economists see both Spain and the euro region economy growing at 1.9 percent pace, according to the median estimates in Bloomberg News surveys. The Spanish survey included 12 forecasts and the euro-region survey included 29.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

Last Updated: March 9, 2008 18:39 EDT