Spain's right-leaning prime minister, Mariano Rajoy, warned on Wednesday that the country's near 23-percent unemployment rate will rise even further this year.

Spain's unemployment rate hit a 17-year high 22.85 percent at the end of 2011 -- the highest in the industrialised world -- as the number of job seekers shot above the five-million barrier.

"It is hard to imagine a worse starting point for this session," Rajoy, who took power in December after his Popular Party won by a landslide in November 20 elections, told parliament's lower house.

"For unemployment, the situation could not be worse," the grey-bearded, 56-year-old Spanish leader said.

"We find ourselves in a critical situation with an unemployment rate of 22.9 percent," he said.

"Unfortunately, these figures will not get better in the short term. More than that; in 2012 they will get worse."

Spain's economy is sliding towards recession, shrinking by 0.3 percent in the final quarter of last year, according to official figures, and predicted by the Bank of Spain to contract by another 1.5 percent in 2012.

Rajoy said the labour market had to be reformed to become more flexible, to make it easier to switch between jobs and to adapt to the economic circumstances.

His cabinet is scheduled to adopt labour market reforms on Friday.

It will be the third major economic reform since the government approved a financial sector shakeup to strengthen bank balance sheets and took measures to try to limit the public deficit.

The 2008 property bubble collapse and global financial crisis destroyed millions of jobs, left banks with huge bad loans, and Spain's national and regional governments with big debts.

The government is now struggling to slash a bloated public deficit and avoid being dragged back to the centre of a crisis of confidence in eurozone sovereign debt.

Prime Minister Mariano Rajoy plans 8.9 billion euros ($11.7 billion) in new budget cuts, tax increases to rake in 6.3 billion euros, and an anti-tax fraud campaign to recoup about 8.2 billion euros.

But that cost-cutting opens the prospect of even more job losses in hard economic times.

Street protests against the austerity measures are growing.

On Tuesday night, thousands of firemen, nurses and other public sector workers protested noisily in Madrid against crisis spending cuts that they say threaten crucial services in the region.

Several thousand protesters filled an avenue in the centre of the city, sounding horns and drums, waving red, green and blue flags and yelling "Public services are not for sale!"

They were protesting the conservative regional government's decision to extend their working hours and cut sickness benefits for public sector workers, some of whom earn little more than 1,000 euros ($1,325) a month.

They also warned that the spending cuts -- part of nationwide efforts under a new conservative Spanish government to strengthen the country's public finances -- were undermining social care and emergency services.