Nov. 3 (Bloomberg) -- Spain will allow unemployed workers to put off paying half their monthly mortgage payments for two years, Prime Minister Jose Luis Rodriguez Zapatero said today, part of a series of measures aimed at softening the impact of a shrinking economy.

The postponed payments, up to a maximum of 500 euros ($640) a month, will be repaid from January 2011 in installments, Zapatero told a news conference in Madrid today. The measure, which applies to mortgages under 170,000 euros ($218,000), could be used by more than 500,000 people, he said.

While the government will guarantee the payments due from 2011, the banks will bear the cost of the two-year postponement, said a spokeswoman at the Finance Ministry, who declined to be identified in line with policy.

Spain's economy, once the motor of job creation in the euro region, contracted in the third quarter for the first time in 15 years and the European Commission said today it expects the economy to shrink 0.2 percent next year. Unemployment rose to a European high of 11.3 percent in the third quarter and the commission forecasts a rate of 15.5 percent in 2010, almost twice the prediction for the euro region of 8.7 percent.

Rising Defaults

As unemployment rises and the economy slows, Spanish banks are suffering from a surge in defaults and a decline in lending. Second-largest lender Banco Bilbao Vizcaya Argentaria SA said Oct. 29 its arrears as a proportion of total loans rose to 1.54 percent in September from 0.88 percent a year ago, while its loan book in Spain and Portugal shrank 1 percent in the third quarter.

The Spanish Banking Association offered its support to the move announced today.

``The banks are always ready to collaborate with the government in measures that help their clients. If this is a step in that direction, it can count on the sector's support,'' said a spokeswoman in a phone interview from Madrid.

Zapatero also announced other tax measures to help home- owners and those saving to buy a house, and said the government would give a 1,500-euro tax break to companies that hire unemployed people with family responsibilities. It will also offer incentives for hiring in industries focused on research and development, and for unemployed workers who become self- employed.

Stimulus Plans

He said the measures focused on employment would cost about 170 million euros in 2009 and 2010. He declined to give an estimated cost for all the measures.

Spain's Socialist government approved an 18 billion-euro stimulus package in April, followed in August by another 20 billion euros in financing aimed at reviving the once-booming economy. In a move to ease pressure on banks and spur lending, Spain plans to buy as much as 50 billion euros of assets such as mortgage-backed securities from banks and it will guarantee as much as 100 billion euros of new bank debt this year.

The slowdown, which started with the collapse of a building boom, has turned Spain's budget surpluses into a deficit. The European Commission forecast today that Spain's deficit would swell to 3.2 percent of output in 2010, above the limit of 3 percent set out in European budget rules.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

Last Updated: November 3, 2008 09:16 EST