Spain's Socialists seek talks but third election still looks likely

By Angus Berwick

MADRID (Reuters) - The leader of Spain's Socialists said on Monday he would seek coalition talks with smaller parties, as the country lurches towards its third election in a year following several failed attempts to form a government.

Pedro Sanchez, whose party finished second in an inconclusive national election in June, said he wanted to discuss options with two newcomer parties, anti-austerity Podemos ("We Can") and centrist Ciudadanos ("Citizens").

He was also willing to talk to the conservative People's Party (PP), which won the most votes.

But he said he would continue to oppose a PP government, ruling out the alliance that many analysts view as the only feasible option for averting a third election.

The Socialists' opposition last week in two parliamentary confidence votes doomed to failure an attempt by PP leader and acting prime minister Mariano Rajoy to form a coalition.

That extended a political stalemate that has held the country in its grip since December when an earlier national ballot also ended without a clear winner, frustrating Spaniards who are beginning to enjoy the fruits of recovery after a long recession.

Parties now have two months to put aside their differences and form an administration. Failing that new elections will be called, probably in late December.

"Let's begin a round of talks to see what solution we find," Sanchez told a news conference on Monday.

Sanchez failed to form a government with backing from the smaller parties in March, with Ciudadanos and Podemos refusing to support each other.

The two smaller parties remain deeply divided on issues including economic policy and a referendum on independence for the Catalonia region.

Assuming they do not bridge their differences and Sanchez remains opposed to Rajoy, the latter would need to persuade the smaller parties to back him to win any further confidence vote.

"My intentions can be summarized in one word: persevere," Rajoy told a news conference at the G20 gathering in Hangzhou, China.

King Felipe, who acts as broker between party leaders, said on Monday he would not for now hold a fresh round of formal consultations.

Spain's economic recovery has so far held up well amid the political uncertainty, underpinned by a thriving tourism industry and low oil prices.

But challenges are mounting, ratings agency Moody's said in a report on Monday, citing a poor outlook for tax revenue and describing last week's failed confidence votes as credit-negative.

(Editing by Sarah White and John Stonestreet)

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