* Socialist leader Pedro Sanchez resigned on Saturday
* Socialists have to decide to back PM Rajoy or force new
* Third election will be called after end of October
* Spain's political deadlock has lasted for over nine months
By Angus Berwick
MADRID, Oct 2 An end to Spain's nine-month
political deadlock is in sight after the Socialists' leader
resigned but the party will have to patch over deep divisions
and strike a deal before the end of October for the country to
avoid a third election.
Pedro Sanchez quit on Saturday after a majority of party
members voted to oust him at a chaotic assembly meeting in which
a rift within Spain's main opposition party over how to resolve
the country's impasse spilled over into anger and bitterness.
It marked the most dramatic turn in Spanish politics since a
national election last December ended four decades of two-party
rule and forced parties to negotiate over a government.
Sanchez had led a stand-off with acting Prime Minister
Mariano Rajoy's conservative People's Party (PP), which won the
most votes in December and in a repeat election in June but fell
short of a majority in parliament.
With all other possible party combinations exhausted or
lacking the numbers, Rajoy can only govern with the consent of
the Socialist PSOE, which ruled Spain from 2004 to 2011 and
holds 85 out of the 350 seats in parliament's lower house.
Frustration within the Socialists' ranks at Sanchez's
intransigence prompted half its leadership to step down this
week. A former Socialist leader accused Sanchez of lying about
his intentions and the Spanish press hounded him to resign to
"save the party".
But even without Sanchez, seen as the biggest stumbling
block to a new government, the Socialists' interim management
has just three weeks to decide whether to allow a conservative
minority government under Rajoy or force Spain's third general
election in a year.
"The Socialists have no risk-free political option,"
Vincenzo Scarpetta an analyst at the Open Europe think tank in
Scarpetta cited Greece's long-established centre-left party
PASOK as an example of what could happen to Spain's Socialists.
In 2012 it joined a conservative-led government only to be
subsequently wiped out by the rise to power of the far-left
NO RISK-FREE OPTION
Facing another election could be just as disastrous when the
party is in such disarray, say analysts, as it could hasten the
Socialists' steady slip in the polls behind the PP which Sanchez
presided over. He notched their worst-ever national election
result in June.
Podemos, an anti-austerity party which emerged during
Spain's deep recession and is now its third largest, has
declared its intention to replace the Socialists as the
country's main left-wing force. Its members have jumped on
Sanchez's resignation as an opportunity to stake this claim.
"In the PSOE those who support handing the government to the
PP have won," Podemos's leader Pablo Iglesias wrote on Twitter
after Sanchez's resignation. "Facing a corrupt government, we
will continue with and for the people."
An abstention could also put the party's temporary
leadership, whose members lean into the anti-Sanchez camp and
will be in place until a party conference can appoint a new
leader, at odds with its grassroots.
Polls this week showed a majority of ordinary members
favoured Sanchez remaining as leader and several hundred rallied
outside the Socialist headquarters on Saturday night to decry
what they called a party coup.
"This is a conspiracy led by the right-wing," said Jose Luis
Rodriguez, a 74-year-old retired doctor.
Politicians from the PP and Spain's fourth-largest party,
centrist Ciudadanos said on Sunday there could be no more delays
in forming a government, although they stopped short of calling
for the Socialists to abstain.
Although Spain's economic recovery has weathered the
political impasse so far, there are signs that further
uncertainty could slow growth, hamper investment, and leave it
increasingly adrift from its international partners.
Ciudadanos leader Albert Rivera said on Twitter that what
was needed now was dialogue and chastised the Socialists for
prioritising internal party politics over the country.
Ciudadanos have backed both the PP and the Socialists in
confidence votes over the past nine months, but in neither case
was that enough to reach a majority.
"Spaniards do not have any more time and neither do they
deserve more deadlock," Rivera said.
(Editing by Julien Toyer and Catherine Evans)