"It's a catastrophic year," said Carlos Duran, who owns farms in Spain and Portugal. "We've never seen a drought like it."

All three countries' grain crops have been halved or worse.

Spanish farmers expect huge economic losses and even beekeepers are affected by a lack of flowers to feed their hives. Portuguese farmers say the price of hay has doubled.

Forest fires have ravaged Spain and Portugal -- where official data show 68 percent of the country is in severe or extreme drought.

"There could be more fires (than usual)," a Spanish Environment Ministry spokeswoman said. "The fires started earlier this year."

Spain has had 51 percent more fires so far this year than for the same period a year ago while in Portugal the number of fires is more than twice the average of the previous five-year period. That includes 2003, when about 10 percent of Portugal's forests burned in a devastating heat wave.

Water tankers are supplying 16 Portuguese towns, Portugal's Water Institute said, while utility Iberdrola, one of Spain's biggest companies, has seen its hydraulic energy production cut 57 percent in the first quarter.

MOROCCO GROWTH SLASHED

Drought coupled with high oil prices have led Morocco to slash its growth forecast for this year to 1.3 percent from a previous 3.5 percent.

In Spain, where water reserves stand at just 57 percent of capacity, the situation is not as drastic but Secretary of State for the economy David Vegara said last week there was a risk the drought would send prices higher.

In Portugal the pulp and paper industry could be at risk from forest fires.

The Spanish and Moroccan governments are spending millions to help farmers. Spain is offering 750 million euros ($916.3 million) in subsidised loans while Morocco is channelling about $350 million, including debt relief and credit lines.

Spain asked the European Commission in a letter seen by Reuters to bring in up to 8 million tonnes of grain from EU stores containing surplus grain from other EU countries. They expect to get the green light to bring in an initial 500,000 tonnes this week, a senior Agriculture Ministry source has said.

Such transfers are controversial as they often include transport subsidies and because they reduce the amount of grain traditional suppliers can sell.

The cause of the drought was a northward shift in an Atlantic high-pressure system that blocked the usual winter rains, a Portugal weather service spokeswoman said.

The area now is in its normal summer dry spell, she said.

Moroccan experts believe this drought is the start of a new cycle which could hit the next two crop years.

Spanish meteorological expert Antonio Mestre says it too early to tell but heavy rain would be needed in September to compensate for this year.