Spain is in an "unprecedented" double-dip recession and the outlook for the country remains "very difficult" with "significant downside risks", the International Monetary Fund has said.
Its annual report on the Spanish economy praised Madrid's "decisive action on many fronts", but warned further reforms were needed.
Action to cut debt and push financial reform were "critical", it said.
Earlier, figures showed Spanish unemployment hitting a fresh high.
Almost 5.7 million Spaniards are now out of work, with the jobless rate reaching 24.6 per cent during the April to June quarter - the highest since the 1970s.
Despite the worsening jobless figures, Spanish stocks rose sharply on Friday after French President Francois Hollande and German Chancellor Angela Merkel issued a joint statement suggesting they were ready to act to save the euro.
The main Spanish Ibex share index closed up 3.9 per cent, while France's Cac 40 rose 2.3 per cent and Germany's Dax ended the day 1.6 per cent higher.Battered banks
The IMF forecast the Spanish economy to contract by 1.7 per cent this year and 1.2 per cent next year, before growing by 0.9 per cent in 2014.