The IMF cautioned Spain on Friday that its deficit-reduction goals rely on overly optimistic economic forecasts and its budget picture will darken if the economy proves weaker than the government expects.

In its annual review of the Spanish economy, the International Monetary Fund forecast a more sluggish recovery in the recession-hit Spanish economy than the government had.

The IMF said Spain's recovery would be "fragile and weak'' with domestic demand weighed down by high unemployment — the highest in the euro zone — and budget cuts.

Earlier this year, investors feared Spain would follow Greece into a sovereign debt crisis. Those worries have eased and the government has had no problem raising money and paying its bills.

The IMF projected the economy will shrink this year by 0.4 percent, before growth resumes at a tepid 0.6 percent next year, rising to 1.7 percent in 2012. Compared, the government sees the economy contracting 0.3 percent this year before 1.3 percent growth in 2011.

The Fund said Spain's budget-tightening plans were correctly front-loaded, with nearly two-thirds of the needed adjustment achieved by 2011.

"But the envisaged adjustment is based on potentially optimistic macroeconomic projections,'' IMF staff added.

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