Madrid, Oct 24 (IANS/EFE): Spain's economy contracted 0.4 percent in the third quarter and continues to face strong headwinds, the central bank said Tuesday.

Adverse financial conditions eased "somewhat" and the decline in domestic demand was 1.2 percent, an improvement over the 1.4 percent fall in the second quarter, the Banco de Espana said in its latest bulletin.

The bank noted, however, that the additional consumer spending in the July-September period can be explained by households' deciding to move up planned purchases of durable goods ahead of a coming increase in value added tax.

That "cushioning" effect is likely to evaporate in the fourth quarter, the bank said.

An unemployment rate approaching 25 percent, the drop in real incomes and continued debt-deleveraging by households all militate against more robust consumer spending, the Banco de Espana said.

The fall in public-sector expenditures intensified in the third quarter and exports, while still strong, contributed less to gross domestic product than during the April-June period, according to the report.

The Spanish economy remains hampered by the fallout from the collapse of a long-building housing bubble, which left many of its banks saddled with toxic assets and created an overhang of unsold homes.

Weak domestic demand and a slowing global economy have made Spanish businesses reluctant to invest in expansion or new ventures, the bank said.