AFP - Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday unveiled a plan to reform the country's rigid labour market rules in a bid to tackle the highest unemployment rate in the euro zone.

Flagship measures would include allowing firms to cut costs by shortening workers' hours but without making them redundant, as Germany has done, Zapatero told a news conference following talks with union and business leaders.

Under the German scheme, worker hours can be reduced for a period of up to two years with the state paying up to two thirds of their regular salary.

Madrid also proposed measures to cut the use of temporary contracts, promote permanent part-time job contracts and encourage the hiring of unskilled youths.

"This is an oilfield for employment," Zapatero said of the reform plans, which were well received by both unions and the Confederation of Employers and Industries of Spain (CEOE).

"My first impression is positive. All the main lines of the document go in the right direction," said CEOE president Gerardo Diaz Ferran.

Zapatero warned Spain needed to bridge the gulf between job market insiders -- workers on a permanent contract -- and outsiders: those on temporary contracts who have far fewer benefits and rights and who are easy to dismiss.

At the end of 2009, more than 25 percent of Spanish workers were on a temporary contract compared to an average of 14 percent for the 27-nation European Union in 2008 according to Eurostat.

Spain's unemployment rate soared to almost 19 percent in the fourth quarter, the second highest in the EU after Latvia, and far above the average of 10 percent for the 16 countries that share the euro zone.

Earlier on Friday the country's central bank said the Spanish economy contracted 0.1 percent in the fourth quarter of 2009, after shrinking 0.3 percent in the previous quarter, and was down 3.6 percent last year as a whole.

Europe's fifth-largest economy has proved especially vulnerable to the global credit crunch because growth relied heavily on credit-fuelled domestic demand and a property boom boosted by easy access to loans that collapsed in late 2008 after a decade of frenzied building activity.