A slide in domestic demand, battered by a 25-percent jobless rate, overwhelmed a slight improvement in the trade balance, according to preliminary figures from the National Statistics Institute.

Gross domestic product dropped by a quarterly rate of 0.3 percent, marginally better than the previous quarter's 0.4-percent decline, the report showed.

But when compared to output a year ago, the economy slumped 1.6 percent in the third quarter -- the sharpest annual decline since the end of 2009 during the previous recession provoked by a 2008 property crash.

The eurozone's fourth-largest economy is hovering on the edge of a sovereign bailout, after already securing a eurozone rescue loan of up to 100 billion euros ($129 billion) for its banks.

Prime Minister Mariano Rajoy said this week that the government had not made a widely anticipated formal request for eurozone aid because it was "not essential".

Spain's 10-year bond rates rose above 7.0 percent in mid-summer but borrowing costs tumbled after European Central Bank outlined plans in September to buy an unlimited amount of Spanish bonds to curb rates.

The drop in borrowing costs gave Madrid some breathing space although Spanish 10-year bond yields remain relatively high at 5.65 percent.

But Madrid hesitates formally to ask for a eurozone bailout with ECB aid, which would mean submitting to strict economic conditions and international supervision.

In the meantime, it is battling to slash its heavy public deficit alone, launching a programme to squeeze out 150 billion euros in savings between 2012 and 2014, including 39 billion euros in 2013.

That same austerity programme, however, acts like a brake on domestic economic activity.

The Bank of Spain warned recently that the efforts to clean up the budget deficit had a "clear impact" on the mid-year slump.

The central bank last week said the performance might have been even worse in the third quarter but for a government announcement that it would raise sales tax from September 1.

The impending sales-tax rise prodded many people to go out and buy durable consumer goods such as washing machines and televisions in July and August before the price went up.

The sales tax rise also sent consumer prices up by 3.5 percent in the year to October, however, the Spanish statistician said in a release of preliminary data.

The inflation rate was unchanged from September.