SPAIN'S budget deficit was the largest in the European Union last year, underlining the challenge faced by Prime Minister Mariano Rajoy as he prepares a new plan to foster an economic recovery.

Eurostat, the EU's statistics agency in Luxembourg, yesterday reported that Spain's 2012 deficit widened to 10.6 percent of gross domestic product, swollen by the cost of bailing out its banking system. That's up from 9.4 percent in 2011 and is worse than Greece's 2012 budget gap of 10 percent.

A limit of 3 percent of GDP is imposed by the EU on all members.

Rajoy pledged last week to unveil measures on Friday to make the eurozone's fourth-largest economy more flexible and competitive. That announcement will end a week of reports ranging from a first-quarter GDP estimate to data showing whether unemployment has hit another record.

Rajoy is bidding for more time from EU peers to reorder public finances as he aims to end a six-year economic crisis, aided by the European Central Bank's pledge to do whatever it takes to preserve the euro. International Monetary Fund Managing Director Christine Lagarde said last week that Spain needs more time to cut its deficit.

"Spain needs another two to three quarters to fully reassure investors," said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. "Beyond the ECB's support, it must prove the economy's improvement is structural and that the bank recapitalization is sufficient to deal with the increase in non-performing loans."

Spain's shortfall grew while the eurozone's combined deficit narrowed to 3.7 percent of GDP from 4.2 percent a year earlier. Germany had a budget surplus last year.