A COAG official in one of the worst affected areas, Huesca, says some farmers will abandon the land because of the drought.

"A dud year without a harvest ... is an irreversible step back," said Esteban Andres, head of COAG in Huesca. "No one buys machinery, young people don't stay (in the town), there's no investment."

In Murcia, a parched area in the southeast where water reserves stand at just 16 percent of capacity, farmers have asked permission to dig new wells in over-exploited aquifers -- underground water beds -- although they know any water they get will be so salty it will need treatment.

"50,000 hectares of citrus and fruit trees could be lost," said Alfonso Galvez, head of the Murcia arm of farmers' union ASAJA, adding that meant 80 million trees.

The region is set to receive a transfer of water from the Tagus river, approved by the government amid controversy in the area set to lose the water, but less than what it asked for.

The transfer has prompted supply fears in neighbouring Portugal, also suffering the worst drought since the 1940s.

Regional governments in Spain have taken urgent measures to combat the drought. Andalusia, a major tourist region in the south, has brought emergency wells on line to keep the Costa del Sol supplied, a government spokeswoman said.

In Portugal, where 79 percent of the country is in severe or extreme drought, authorities have decided to drill new wells in the Algarve tourist region, agency Lusa reported.

Catalonia has restricted water use for agriculture and forbidden taking water from reserves for hydroelectric energy, an official statement said.

Spain's second largest power utility Iberdrola saw hydroelectric production fall in the first quarter and grid operator Red Electrica has had to cut power to industrial clients because of surges in demand.

BREAD, OLIVE PRICES TO RISE

Spain's inflation rebounded in June to 3.2 percent after a sharp drop in May, the National Statistics Institute said, which economists blamed partly on the drought.

Bread prices are expected to rise as official estimates put the wheat harvest at about half last year's. Olive oil prices are also likely to increase on a bad harvest, farmers say.

A lack of water has also dissuaded farmers from planting maize, a thirsty crop grown mostly on irrigated land, with maize sowings this year down 8 percent on last year.

Meteorologists say it is too soon to tell whether this is the beginning of a new dry cycle for Spain, which suffered a five year drought from 1990. But whether it continues or not, Spain's government has recognised it needs to solve historic water problems.

The one-year old government has launched a water plan which includes setting up desalination plants across the country.

Demand for water is increasing with some 700,000 houses built last year and two million foreigners owning a second home in Spain, according to a recent survey.

Golf courses and swimming pools in the dry tourist areas of the southeast stretch already tight supplies.

Wastage is also a problem with about a fifth of Spain's water getting lost in the distribution system, according to 2001 data from the National Statistics Institute.