Spanish socialists pledge new era after poll victory

· Zapatero fails to achieve absolute majority
· Tribute to politician shot dead before election

Spain's socialist prime minister, José Luis Rodríguez Zapatero, won a convincing general election victory last night after a campaign thrown into turmoil at the last minute by the killing of a politician, blamed on Basque separatists Eta.

Speaking to ecstatic supporters at the socialist party's headquarters in central Madrid last night, Zapatero first paid tribute to Isaias Carrasco, the former socialist town councillor who was shot dead two days before the elections. He went on to thank the "voters who have given a clear victory to the Socialist party", after a polling day that saw a turnout of over 75%.

"The Spanish people have spoken clearly and decided to start a new era," he said, adding that he had received a phone call from his defeated opponent, Mariano Rajoy, congratulating him on his victory.

"I will govern for all, but thinking, before anyone else, of those who don't have it all," he said, before signing off with his much-mocked campaign slogan, "Good night, and good luck", taken from the George Clooney film of the same name.

Rajoy, who admitted defeat with around 91% of the vote counted, has been beaten by Zapatero in two successive elections, and will face calls to stand down.

After a bitter and divisive campaign dominated by fears over a stumbling economy and rising immigration, Zapatero fell short of the absolute majority that he had been hoping for. Socialist party officials will now be forced to negotiate with smaller regional parties in order to form a government.

But Zapatero now has the chance to throw off the "accidental" prime minister tag that dogged his first term. He won in 2004 thanks in part to a protest vote against the People's party (PP), whose leaders had tried to manipulate the aftermath of the Madrid train bombings, in which 191 people were killed and 1,800 injured.

Last night's victory was an endorsement of Zapatero's record in his first term, which saw the withdrawal of troops from Iraq, the introduction of social reforms, including the legalisation of gay marriage, and the cession of more power to Spain's semi-autonomous regions.

In the next four years, Zapatero plans to extend his social reforms, pledging to create 2m jobs, to increase the minimum wage and maternity leave and to spend heavily on a high-speed train network. The socialists want to introduce stronger anti-discrimination legislation, and promise a string of green laws, including spending €9bn on renovating houses to reduce their emissions.

The biggest challenge facing Zapatero is the downturn that has hit a once-booming economy. The wheels have started to come off after 10 years of spectacular growth that saw the creation of new wealth and 600,000 jobs a year.

Zapatero has to overcome rising unemployment, inflation at double the EU average, and a crisis in the construction industry, which has been hit by the global credit squeeze. Having seen the economy grow at a rate of 4% in recent years, analysts say it could drop to 2.5% this year.

Others argue that the Spanish economy is more flexible and better prepared than ever to deal with a global slowdown. "The main scenario we are looking at is not of a recession but a downturn, which will be less damaging but perhaps more protracted, and with a slower recovery," says Santiago Fernández de Lis, a partner at financial analysts AFI. Like many, De Lis argues that Spain needs long-term structural reform, with more investment in research and development and education.

Spain's growth was built partly on the backs of the five million immigrants who have come to the country in the last 10 years, and now make up 10% of the population. But immigrants have been among the first to be hit by rising unemployment. During the campaign, Rajoy seized on fears of unemployed immigrants soaking up the country's welfare payments, telling Zapatero in live televised debates - the first to be held in Spain in 15 years - that he had caused an "avalanche" of migrants.

Though Rajoy's populist campaign alienated many centrist voters, immigration remains a serious concern in a society that has yet to come to terms with the dramatic demographic changes it has recently witnessed.

The murder of Carrasco highlighted the fact that conflict in the Basque country is never far from the top of the political agenda. Zapatero was criticised for failed negotiations with Eta; it remains to be seen whether peace talks will be resumed.

Poll numbers

With 96% of results in, the Spanish Socialist Worker's party had won 43.7% of the vote, giving it 169 seats in the lower house, an increase of five on 2004, but short of the 176 needed for an absolute majority. The People's party won 40.1%, which translates to 154 seats, up six on 2004. After one of the most rancorous campaigns in the post-Franco era, the undoubted losers were the smaller parties, confirming the two-party nature of Spanish politics. The pro-Catalan independence ERC lost five seats, leaving it with only three, and the leftwing Izquierda-Unida lost two seats, winning only three.