Spain said it will allow unemployed workers to put off paying half their monthly mortgage payments for two years.

The plan is part of a series of measures by the Spanish government to soften the impact of a shrinking economy.

The postponed payments, up to a maximum of $640 a month, will be repaid from January 2011 in installments, Prime Minister Jose Luis Rodriguez Zapatero said Monday.

More than 500,000 people will be eligible for postponements, which will apply to mortgages under $218,000, he said.

A spokeswoman at Spain's Finance Ministry said the government will guarantee the payments due from 2011, but the banks will bear the cost of the two-year postponement.

Spain's economy, which once helped create jobs in the euro region, contracted in the third quarter for the first time in 15 years, and the European Commission said Monday that it expects the economy to shrink 0.2% next year.

The country's unemployment rate rose to a European high of 11.3% in the third quarter, and the commission says the rate will rise to 15.5% in 2010, almost twice the prediction for the euro region of 8.7%.

As unemployment rises and the economy slows, Spanish banks are suffering from a surge in defaults and a decline in lending.

Banco Bilbao Vizcaya Argentaria SA said last week that its arrears as a proportion of total loans nearly doubled in September from a year earlier, to 1.54%, and that its loan book in Spain and Portugal shrank 1% in the third quarter.

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